Performance varied widely across the industry, with the M&E and infrastructure sectors looking healthy despite the financial turmoil. Experian Business Strategies explains why …

Overview

There has been little visible improvement in the economic environment in recent months – indeed, some have gone as far as to suggest that a recession could be a reality very soon. The credit crunch is still having an unprecedented impact. Some sectors are having to contend with a double whammy of reduced demand and a constrained ability to supply.

That said, the latest output statistics from the Department for Business Enterprise and Regulatory Reform (BERR) showed that the construction continued to expand in the first quarter, even after allowing for inflation – total output increased 2% to £20.9bn, in 2000 prices, in the first three months of the year.

It is no surprise that sectoral performances varied widely, but despite this, the new work and repair and maintenance (R&M) sectors grew at the same rate – 2%. New work output rose to £11.5bn and R&M to £9.4bn.

Housing has been the first sector to show signs of difficulty. Lack of mortgage availability has stifled demand, particularly for new-build properties, and housebuilders have been reluctant to embark on new developments. Year-on-year output fell by 10% to £2.5bn, in 2000 prices, the weakest quarterly outturn since the third quarter of 2003.

It was a different story for infrastructure. In the first quarter of 2008 output was up substantially by 16% in real terms. In part, this buoyancy was owing to work accelerating on Transport for London’s extension to the East London Line. Investment by water and sewerage companies also boosted the sector.

The big surprise on the R&M side was the strength of the public non-residential sector. Output rose by 10% year-on-year in the first quarter, to £1.65bn in 2000 prices. One explanation for this buoyancy is that there is a limit to how long R&M can be postponed in this sector. When government finances looked ropey a few years ago, public R&M investment was the first to suffer. Maybe the acceptable postponement time has now elapsed and attention has turned to addressing the backlog.

New work orders totalled £7.9bn, in 2000 prices, in the first quarter, 6% down on the £8.4bn achieved in the first quarter last year. Housing and private non-residential orders were both subdued and infrastructure and public non-residential orders remained buoyant.

Private housing orders were down by 26% in the first quarter. Commercial orders also took a tumble, but the contraction was mild in comparison. Orders slipped by 7% to £2.7bn, in 2000 prices. The commercial sector is also exposed to the turmoil in the financial markets and so some schemes have returned to drawing board. Others have been scaled back or postponed.

2008-10 forecast

The chart (see below) presents sectoral forecasts for 2008 to 2010. Performances are expected to be mixed. Overall industry output is forecast to be 2% lower in 2010 than in 2007 as private housing output falls. With no end in sight for the credit market problems, housebuilders face a difficult two years. Demand, however, remains strong and prospects improve for the sector in 2010. While falls are forecast for the commercial and industrial new work sectors, work will commence or progress on infrastructure projects and the Building Schools for the Future programme. The Olympics will boost the public non-residential sector.

Regional new work output

New work output continued to rise in most UK regions in . The NE region was 19% in the first quarter compared with the first quarter last year. Other regions to record robust growth in early 2008 were KNT, LON, SE and WM. A few regions recorded a fall in output. Most severe was a 7% fall in the EM. Milder contractions were seen in BED, EA and S.

Regional R&M output

R&M output recorded strong growth in some regions in 1Q08. NE gave an even stronger performance than its new work component – R&M output rose 27% in 1Q08. More moderate double-digit growth (of between 10% and 15%) was recorded in YH, EA, KNT, SE and NW. LON was the only region where R&M output fell in the first quarter, down by 5% to £1.7b in current prices.

Regional new work orders

The size of individual contracts can make orders data prone to fluctuation on a regional basis. Orders rose 52% in EA and KNT in the first quarter compared with the previous year. The NE was relatively strong once again, with orders up 33%. The first quarter was considerably weaker for a few regions. Orders fell by 33% in YH and 22% in the EM. NW orders fell at the steepest rate, by 36%.