Building intelligence Q3 2005: Is the party over?

The construction industry proved not to be immune to the general slowdown in the economy in 2005, with only the private housebuilding and public non-residential repair and maintenance sectors performing better than expectations, says Experian's Business Strategies Division.

However, the decline is forecast to be short-lived, with the industry returning to growth this year and the rate of increase strengthening to 2008. The downturn in construction is very slight, with total output estimated to have fallen by about 0.5% in 2005. The public sectors have been much weaker than previously forecast, with new public housing output estimated to be down by about 7%, a very surprising outturn considering the pressure to deliver increasing levels of affordable housing. Public non-residential construction is likely to have dropped by 8%, with an hiatus in health construction standing out especially.

Looking forward, however, the slight downturn in the industry is likely to be short-lived - although the public sectors are unlikely to continue to be quite the main drivers of construction industry growth that they have been in recent years. However, government spending is likely to hold up reasonably well in the short term despite the current concern over public sector finances.

Forecasts are for a modest increase in output of about 1.7% in 2006, with output growth strengthening to more than 3% in each of the following two years. The main drivers of this growth are expected to be the general economic upturn that is forecast, with a return to trend GDP growth from this year, a strengthening housing market, work on directly and indirectly related Olympics projects, and the aforementioned government spending.

Orders 

According to the latest figures from the DTI, total new work orders in the third quarter of 2005 were £7.5bn (2000 prices), down 7.9% on the previous quarter's figure of £8.1bn.

In quarter-on-quarter terms declines were seen across the board, except in the public housing and public non-residential sectors. The largest fall was suffered jointly by private non-residential and commercial and both declined by 15.9%. Falls of a smaller magnitude were seen in private housing and infrastructure orders.

In the first three quarters of 2005 total new work orders were 4.6% higher than during the corresponding period of 2004. Infrastructure orders were up a massive 47.5% from 2004 and industrial an impressive 16.7%. Public housing and non residential and commercial and housing on the private side both fell over the first three quarters.

Output 

Total construction output in Great Britain in the third quarter of 2005 was £20bn (2000 prices), up just 0.5% from the second quarter.

In annual terms new work output has been falling for three consecutive quarters, dropping 1.1% in the third quarter of 2005 to stand at £10.7bn in real terms. The industrial sector increased both in quarterly and annual terms. At the other end of the scale the public sector (both housing and non-residential) declined noticably in direct contract to recent years when publicly funded investment was the main driver of output growth.

In terms of the quarter-on-quarter change repair and maintenance (R&M) declined marginally from the second quarter of 2005 but was higher than in the third quarter of 2004. R&M output stood at a real £9.3bn in the third quarter, accounting for 46% of the total.

The public sector has been much weaker than previously forecast

Regional orders

The latest data from the DTI shows that total orders, in current prices, in the UK in the third quarter of 2005 were 2% down on those in the second quarter of 2005, but 14% up from the third quarter of 2004.

The majority of regions saw their volume of total orders rise year on year and only three regions, Yorkshire and the Humber, the South-west and the North-west, recorded annual declines by 4%, 17% and 5% respectively. Order growth was particularly robust in the South-east (part 1) region and the North-east.

An exceptionally strong second quarter meant that in quarter on quarter terms Welsh orders fell by the greatest magnitude, declining by 24%. However, orders remained high and rose 34% from the third quarter of 2004. Quarter-on-quarter orders grew by a substantial 68% in the Eastern (part 1) region followed by a 17% rise in the East Midlands.

The lumpiness of the infrastructure sector was a particular feature of the third quarter. Quarter-on-quarter growth exceeded 100% in five regions over this three month period as several large contracts were let.

According to the National House Building Council (NHBC), whose members build around 90% of all houses in the country, there were 4% fewer starts in Great Britain in 3Q05 compared with 3Q04. The largest rise by some margin was recorded in the North East (38%), while starts in North West, West Midlands, East of England, South West, South East and Wales declined.

Regional output 

The value of total construction output in the third quarter of 2005 was £26.7bn in current prices, up by a marginal 0.1% from the previous quarter and 3.4% against the third quarter of 2004. New work output increased compared to both the third quarter of 2004 and the second quarter of 2005 by 2.9% and 0.8% respectively. Repair and maintenance (R&M) output dropped from the second quarter of the year but was 4.1% higher than in the same quarter of 2004.

Quarter on quarter, the South-East (part 1) region recorded the largest gains in total new work output with a 7% rise, increases of a smaller magnitude was witnessed across the South East as a whole, in north of England, the Midlands and Scotland. Yorkshire and the Humber dropped the greatest amount, falling by 7%. Quarter-on-quarter declines were also seen in the Eastern region, the South West and Wales.

Year on year the only regions not to record growth were Yorkshire and the Humber, London, the North West and Wales. The largest annual increase of 20% occurred in both the East Midlands and the Easter (part 2) region.

Scotland performed strongly in terms of repair and maintenance in the third quarter of 2005 as output rose 28% in annual terms and 16% from the second quarter of the year. Only one other region recorded annual growth in excess of 10% - the Easter (part 2) region (11%).

Overall, the regions' performance in the third quarter of 2005 was mixed. Output rose robustly in Scotland, up 15% annually and 7% from the previous quarter. In contrast output declined in the North West, falling by 1% year-on-year and 5% quarter-on-quarter.