As Experian Business Strategies reports, rising private investment is balancing out the end of the public sector boom, housing is still growing and the only worries are interest rates and a shaky US
The decline in construction output in 2005 proved to be but a minor blip. The latest figures from the DTI suggest 2006 brought a recovery. An increase of 1.3% overall, while sufficient to push the industry’s value past its 2004 level to £80.6bn in 2000 prices, fell short of its 10-year annual average rate of growth of 2% – a surprise, given the strength of the commercial sector. However, declining output in the R&M sector (which accounts for about 45% of total industry output) put a dent in this robust commercial expansion.
Unprecedented levels of investment in the UK’s social infrastructure since 2000 has cushioned the industry at a time when less certain economic conditions curtailed private activity. By 2005, public spending reached a plateau in some areas and started to decline in others, while confidence in the private industry as a whole had not yet recovered to compensate.
By 2006, the private new construction sector was back on form. New work output increased 5% to £44.3bn in 2000 prices. An upturn in the offices market and greater private involvement in new education facilities fuelled a 13% rise in commercial sector output.
Other notable gainers included the industrial sector and, in contrast with the other publicly funded sectors, public housing output rose by 23% as the government attempted to improve the supply of affordable housing.
Focusing on the R&M sector, public and private housing R&M output both declined 3%, and private non-residential output was pretty much flat from 2005.
New work orders suggest 2006’s tentative recovery may strengthen in 2007. Orders climbed 6% to £33.4bn in 2000 prices. Public and commercial housing orders surged ahead, increasing 34% and 31% respectively in real terms. Infrastructure orders declined 28%, although this did follow an increase of 38% in 2005.
While we continue to forecast construction output growth during the next few years, the industry faces several risks which may threaten its future. A major risk comes from the state of the US economy, which has implications for the commercial sector. If the US were to slip into a recession, the effects would be felt globally.
From the UK’s perspective, as well as curbing demand in the US for UK exports, the impact is likely to extend to the Eurozone, home of our main trading partners.
A hard landing for the UK housing market also remains a risk, although we believe the risk to be minor. However, house prices have risen faster than expected in recent months, worsening affordability. And if interest rates were to move higher than expected, the risk of a sharp adjustment in house prices becomes greater.
02 Future trends
The chart compares growth between 2001 and 2005 with expected growth through to 2009. Public housing is expected to be the fastest growing sector, and by 2009 we expect output to be nearly 50% higher than in 2005. While this is a spectacular rate of growth, in absolute terms public housing is the smallest new work construction sector by quite a margin and as such, the effect it has on the industry as a whole is limited. A 32% increase in the commercial sector through to 2009 is therefore likely to be the main driver of industry growth over the forecast period.
03 Regional new work output
New work output in the fourth quarter of 2006 was up year-on-year in all but KNT, although with considerable regional variance. LON topped the league table with output of £2.6bn in current prices, 21% higher than in the fourth quarter of 2005. NE, Y&H, SW, NW and W also saw their quarterly output climb by more than 10%. New work output in EM increased just 1% and it declined 3% in KNT.
04 Regional R&M output
R&M output was relatively strong in the fourth quarter of 2006 and it surpassed that achieved in the first quarter of 2005 across the board – possibly suggesting that sunnier climes are on the horizon in 2007. The greatest increase by far in percentage terms came in the NE, although the fact that it is one of the smallest regions in value terms makes it prone to large fluctuation.
05 Regional new work orders
Turning to orders, for some regions the fourth quarter was exceptionally strong, but for others it was rather weak. New work orders in W totalled £637m, in current prices, in the fourth quarter of 2006, 41% higher than in the fourth quarter of 2005. In contrast EM, BED and S all suffered a double-digit decline.