A Brexit is a real economic risk but a vote to remain could see sunshine replace the gloom in the second half of the year
The latest release from the Office for National Statistics on construction output was seized upon by some as an indication of further softening in UK economic growth. The headline figures certainly made for fairly ominous reading: output down by 1.1% in Q1 of this year compared to Q4 2015, and by 1.9% on the same period last year. Additionally, in March the level of output declined by 3.6% from February, rounding off a subdued quarter.
This is set against some poor numbers from the manufacturing sector as well as signs of cooling activity in the service sector, the main drive of economic growth. However, each sector in the economy faces unique challenges at the moment and when these are combined it can lead to a false narrative on its current performance. There is no doubt that construction output softened in the first quarter but recent lessons learned show that data for the sector is volatile and is often revised upwards. For example, an initial decline of 1.1% in the first quarter of 2015 was subsequently revised upwards to growth of 1.9% in later releases. This is due to late submissions of data as well as seasonal adjustment to the data. Manufacturing, on the other hand, is an export-focused industry so a slowdown in China, a continued slump in the oil industry and the current comparative strength of sterling have combined to hit performance in this sector. Finally the service sector, dominated by finance, appears to be suffering from market jitters over the prospect of the referendum on Britain’s membership of the EU.
So it is easy to combine these factors and presume that the economy is stalling. However, while Brexit is a real risk, that is not the reason for construction output falling in the first quarter. And in fact analysing the figures at the disaggregated level shows that new housing output actually increased at the start of this year. This sector has been the driver of growth in construction over the past three years so it is actually encouraging that the sector remains so buoyant. While I still expect Brexit to dominate the economic headlines, if one is brave and assumes the vote is to Remain I think the second half of the year could see the sunshine replace the gloom.
Michael Dall is an economist at Barbour ABI