The construction industry has been buoyant so far this year with all three main engineering sectors expanding, most regions experiencing growth and the burden of high interest rates easing, says Experian Business Strategies’ latest survey

01 The state of play

It was full steam ahead for construction at the beginning of 2007 as the national activity index climbed to 57. Even employment prospects – the least certain indicator in 2006 – strengthened in January and the number of firms expecting to expand their employment over the next quarter increased significantly.

Forward-looking indicators remained positive, with the orders index at 68 and the tender inquiries index at 63. If these conditions continue, as the indices suggest they will, the industry should easily achieve our latest growth forecast of 2.5% in 2007.

All three main sectors – residential, non-residential and civil engineering – continued to expand in January, albeit with varying conviction. Civil engineering maintained its lead, climbing two points to 61. The residential and non-residential sectors were more subdued. Residential fell one point to 53, whereas non-residential climbed three to 54. Many civil engineering firms said they intended to expand their workforces in the coming months but prospects were weaker in the residential and non-residential sectors.

Forward looking indicators were strong. The non-residential sector is expected to be particularly buoyant, given that its orders indices stood at 78 and its tender inquiries stood at 68. Respondents in the residential and civil engineering sectors also considered their orders and tender inquiry levels to be significantly above average. A value greater than 50 suggests an increase and below 50 a decline.

02 Leading construction activity indicator

According this short-term industry forecasting model, January’s strength will be maintained, if not surpassed over the next quarter. The indicator climbed by one point to 57 in January, where it is forecasted to stand firm in February. The indicator is forecasted to peak at 58 in March.

Reflecting the industry’s strength in the recent past, the indicator has not fallen below 55 in the past 10 months.

The leading construction activity indicator also uses a base level of 50 – above that level shows an increase in activity, below that level a decrease.

03 Material costs

Our survey suggests that in the latter part of 2006 the industry was hit by a rise in the cost of materials. Part of this was caused by higher energy costs, and the results for January suggest that, for some, this burden eased, with 42% of residential and non-residential firms reporting materials cost increases of 5% or less. Only 36% of civil engineering firms reporting inflation of 5% or less.

For a large proportion of respondents, however, rises were significantly higher, particularly for those working in the civil engineering sector. Of civil engineering respondents, 55% reported that annual inflation was running at more than 7.6% in January. Only 32% of residential and non-residential respondents saw prices rise at anywhere near this level.

Interestingly, for a lucky few material prices actually declined – 5% of civil engineering firms and 3% of residential and non-residential firms said prices were lower in January than they were a year ago.

04 Regional perspective

According to the indicators, construction activity expanded in all 11 regions in January. A five point increase in the South-west’s composite indicator pushed it to the top of the regional league table for the first time in at least a year, and activity recovered in north-west England, after having been in decline for almost a year. A four point increase was just enough to push it above 50.

Six regions saw their composite indicators rise: the North, South-east, South-west, West Midlands, North-west and Scotland. Apart from a four point increase in the North-west, rises were muted compared with that in the South-west – with the North, South-east and Scotland’s indicators all climbing by just two points. The West Midlands’ indicator strengthened to 54.

For four regions, January’s performance failed to match that of December’s and the Eastern region’s indicator stood firm at 63 for the second month in a row. Yorkshire and the Humber’s indicator suffered the largest decline by far – a nine point slide took it down to 52. Wales’ indicator fell by four points, while indicators for the East Midlands and Northern Ireland both dropped by three points.

Regional composite indicators incorporate activity, orders and tender inquiries from the past three months to provide a comparable measure of each region’s relative performance.