Building Intelligence Q3 2007: Hidden cracks

01 Activity in the industry

Construction output is likely to have increased for the second consecutive year in 2007. In the first three quarters output rose 2%, according to the Department for Business Enterprise and Regulatory Reform.

New work output, up by 4%, drove the industry forward over this period. Repair and maintenance (R&M) output was unchanged from the first three quarters of 2006.

Modest growth overall masks significant variation between sectors and with the black cloud generated by the credit crunch hovering, just how large the impact on the industry will be is a hotly debated topic.

To the end of September private housebuilding output started to slip. At £8.5bn, in 2000 prices, output was down 1%. Even before the sub-prime problems, however, poor affordability, higher interest rates and a restrictive planning system all threatened to cool the market and subsequently the level of new housebuilding.

With a large increase in public funding already secured, the public housing sector fared much better in the first nine months of last year. Output climbed 15% and reached a record of £2bn, in 2000 prices. As public housing is the smallest of the construction sectors, however, its contribution to overall growth is limited.

Commercial output also rose strongly, by 13% to £12.2bn, in 2000 prices. The outturn for the year as a whole is estimated to have topped £16.2bn, well above the previous peak in 1990. A buoyant London offices market has been a key driver of commercial’s recent success.

Public non-residential output continued to slide as the government tried to reconcile its ambitious public spending programme with lower than expected fiscal receipts. Output fell 5% in the first nine months and this followed a 5% contraction in 2006.

The only other sector to have shown a double-digit increase in output in real terms in the first three quarters of 2007 is private non-housing R&M, up 10% to £9.3bn. The volatile state of the stock market and the consequent seesawing asset values suggests it is unlikely that the main engine of growth was the building market – that is, offices, retail, leisure and so on. A more likely driver is rising R&M work in the infrastructure sector, especially in water and sewerage.

Growth in new work orders slowed in the first three quarters of 2007 after three years of reasonably strong expansion. Orders totalled £25.9bn, in 2000 prices, 2% higher than in the first three quarters of 2006.

Infrastructure orders rebounded strongly in the first nine months of 2007, rising nearly 30%. Public non-residential ones grew more moderately by 9%. Commercial orders were static but those placed in the private housing sector were down by 4%.

02 New work output

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03 R&M output

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04 New work orders

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05 Industry forecast to 2010

Six months ago we were predicting a steady acceleration in growth across the 2007-2009 period on the back of a benign macroeconomic outlook, but much has changed since then. The problems in the US sub-prime market and the level of large financial institutions' exposure to this have dented business and consumer confidence, to such an extent that for the first time in years the word “recession” has been mentioned. We sit very much in the soft landing camp, but there is little doubt 2008 is going to be a much more difficult year for the economy than originally predicted, with a knock-on effect on the construction industry.

Industry forecast to 2010

06 Regional new work output

New work output rose strongly in NE in the third quarter of 2007 by 19% year-on-year. Increases of a similar magnitude, 18%, were seen in LON and YH. Further double-digit increases were also recorded in the NW, W, EA, WM and KNT. Momentum slowed in the third quarter for four regions, EM, BED, SW and S. Output fell most sharply in EM, by 9%.

07 Regional R&M output

R&M output varied significantly across the regions in the third quarter of 2007. NE had the strongest growth. Here R&M output climbed 43%, but the sector’s low value does make it prone to fluctuations. Double-digit growth was seen in six other regions, including a 32% rise in KNT and 19% in BED. As with new work output some regions saw R&M output fall – these were WM, S and LON.

08 Regional new work orders

Orders rose most strongly in KNT – by 32% to £886m, in current prices. Growth of more than 20% year-on-year was also seen in SE and NE, and by more than 10% in NW, LON, WM and BRK. YH recorded more modest growth in new work orders of 7%. Orders fell from the third quarter of 2006 in EM, BED, SW and WM. but declined most sharply in S, by 37% to £879m, in current prices.