Since the fall in output in 2005 – widely regarded as a blip – the industry has failed to bounce back at the speed predicted. But although public sector output declined in the first half of 2006, there has been an acceleration in the commercial sector
01 - A slow recovery in 2006
When output recorded a decline in 2005, its first since the collapse of the London office sector drove the industry into recession in the early-to-mid nineties, it was quickly dismissed as a temporary blip by many industry forecasters. But data for the first half of 2006 suggests the industry has yet to bounce back. While output did not slide further during this period, the immediate return to growth predicted by many failed to materialise.
Focusing on the sectors, it is clear the current weakness lies on the public side. Activity in the private sector expanded strongly in the first half of 2006. Most notable was the acceleration in the rate of growth in commercial output, the UK’s largest sector in terms of value. Overall, however, the benefit of rising output in this and other private sectors was eroded by a decline in public non-housing new work output, and more acutely in public repair and maintenance work.
Signs of an unofficial tightening of the public purse strings have been visible for some time, as the government wrangles to bring its ambitious spending plans and more modest revenue streams into line. Given the relative ease with which R&M schemes can be scaled back (due to the smaller scale, lower value and shorter lead time, and hence lower political penalty), a drop in public R&M work was not surprising. However, a 6% fall in new public non-residential output, in real terms, was, and suggests the scaling back has been more severe than anticipated.
We continue to forecast a return to growth this year. Even better prospects for the commercial sector should help stave off further fallout on the public side. We also expect signs of the long-awaited recovery in the infrastructure sector by the end of 2006.
In the first half of 2006, output stood at £40bn in current prices, exactly on a par with output in the first half of 2005. Having declined by 1.3% in 2005, new work output recovered to stand 4% up on the first half of 2006. R&M output continued to decline, falling by a further 4%. In terms of share, the new work sector again had the edge, taking 54% of the total against R&M’s 46%.
On a sectoral basis, new work output rose strongly in the public housing, industrial and commercial sectors in the first half of 2006. Declines were seen in the infrastructure and public non-housing sectors.
New work orders increased 6% in 2005 and strengthened further in the first half of 2006.
Commercial was the clear winner. Orders rose 41% in the first six months of the year. Conversely, infrastructure orders slid 30% and public non-residential by 11%. Outside of commercial, orders increased in public housing and industrial. Declines were also seen in the private housing sector.
02 - Public sector analysis
The chart (right) clearly shows the trend in public sector output is downwards. New public non-residential output suffered most in the second quarter of 2006, increasing marginally in three regions and rising substantially in Scotland, but declining elsewhere. The most significant declines in new work were seen in East Anglia, the South-west and the East Midlands. R&M output fared slightly better, expanding robustly in East Anglia, the East and West Midlands, Scotland and Bedfordshire.
03 - Regional new work output
With only three exceptions, new work output in the 2Q06 surpassed that in the 2Q05. Output declined in Yorkshire and Humber and the South-west, and was unchanged in Wales. Output rose strongest in the North-east in 2Q06, up 22% from 2Q05. Due to its large size, a 17% increase in London’s output was most significant. Elsewhere, increases ranged from 1% to 10%.
04 - Regional R&M output
R&M output increased in 10 regions in 2Q06. East Anglia topped the league tables, with R&M output up 18% in 2Q06 from 2Q05. Apart from in East Anglia, rises in excess of 10% were also seen in Kent and the West Midlands. However, in contrast, R&M output declined in Yorkshire and Humber, the East Midlands, Berkshire and the North-west.
05 - Regional new work orders
On a regional basis, new orders can fluctuate substantially. In 2Q06 London’s orders were up year-on-year 53%, while orders in Kent declined 32%. Six regions saw new work orders rise. Double-digit rises also occured in Yorkshire and Humber, East Anglia, the North-west and Wales. The strength of orders in London is apparent and suggests a good outlook for construction in the region.