Declines in productivity and real wages, along with the uncertainty around Brexit, are driving down growth forecasts. Only one economic sector actually shrank in Q3 2017, though – but that was construction.
Economic context
UK GDP growth in Q3 2017 was unchanged from the initial estimate at 0.4%, with the Bank of England forecasting the economy will have grown by 1.6% in 2017 overall, down from 1.9% in 2016. This is below the average rate of 1.9% since 2010. Since the start of 2014 the average growth rate has been 2.2% so the latest statistics clearly demonstrate a slowing rate of economic growth. The economy is, however, currently 9.7% larger than the peak before the 2008 financial crash, demonstrating the recovery over the longer term.
Services continue to drive growth, accounting for 79.3% of output in the latest statistics, but with a slowing rate of growth. The production sector (predominantly manufacturing) accounted for 14% of output, with growth accelerating as the weaker currency boosts exports. Construction accounted for 6.1% of output, but was the one sector that shrank in Q3, declining by 0.7%.
The labour market is still proving robust, with unemployment remaining at 4.3% in the three months to October – the lowest since March-May 1975. Comparing both unemployment and employment rates and numbers to the same period in 2016 shows an improving picture, with unemployment down by 0.5 percentage points and employment up by 0.7 percentage points.
In 2018 the challenge will be whether continued growth in housing can offset the declines in other sectors
Inflation continues to exceed the 2% target set by the Bank of England, as the weaker currency drives up the cost of imported goods and services. The inflation rate was 3.1% in November as measured by the Consumer Price Index (CPI), up from 3% in October, and the Consumer Price Index including Housing (CPIH) was unchanged at 2.8%. This is the highest level of inflation in five years, although recent strong increases have abated. The main impact of higher inflation is a decline in real wage growth, negatively impacting consumer spending. In the three months to October 2017 real average weekly earnings fell by 0.4% compared with the same period in 2016.
Another area of economic concern remains productivity, with the government having recently written a national industrial strategy to address the problem. A comparison of output per hour worked ranks the UK as having the second lowest growth rate among G7 countries between 1997 and 2016.
The UK’s slowing rates of growth over the last 12 months have led to a downgrade in forecasts by the Office for Budget Responsibility. It now predicts GDP growth of 1.5% in 2017 (lower than the Bank of England), falling to 1.3% in 2019 and 2020 – well below the forecasts in its March outlook. With real wages falling and productivity declining, it is no surprise the prospects for GDP growth are receding.
The construction sector
The latest ONS figures show UK construction grew by 0.4% between October and November 2017. Comparing output levels with November 2016 shows a rise of 0.4%. Housing remains the main component of growth within the industry over the longer term: while private housing output increased by 8.5% in November from the same month in 2016, private commercial decreased by 2.2%, industrial by 8.4%, and infrastructure by 8.9% over the year. In 2018 the challenge will be whether continued growth in housing can offset the declines in other sectors.
In its latest forecasts the Construction Products Association expects growth of 0.7% in 2017 then zero growth in 2018. The industry is expected to recover by 2019, with growth of 2% predicted. The reason for the return to growth in 2019 is because it is expected that the deal with the EU will be agreed, or at least the details clearer. This will give more certainty in sectors such as commercial which have been performing less well in recent months. In addition, the construction of the first phase of HS2 should begin providing a boost to output. The potential of a “no deal” Brexit or any delays to HS2 would clearly hamper these forecasts. For that reason, the lower scenario forecast predict declines in growth.
The CPA/Barbour ABI Index, which measures the level of contracts awarded using January 2010 as its base month, recorded a reading of 124 for December. This is a slight fall from November but still indicates growth. The reading for private housing increased this month, but there were declines in factories and commercial offices.
Following a 5% decrease in 2016, contract awards values have steadied somewhat in 2017. The value of all construction contracts awarded in the UK in 2017, according to Barbour ABI data on all contract activity, was £71bn, showing a marginal (0.6%) increase on 2016. The trend for volume reduction also continued in 2017, with the number of projects for the year falling by 1.7%.
Projects by region
London was the leading region for contract awards in 2017, with 20% of the UK total and value of around £14bn. Major project awards in London included the £1.3bn Chiltern Tunnels contract, part of HS2. The South-east had the second-highest share of construction contracts by value, with 12% of contract awards. The largest award for the region was the £400m contract for the Port of Dover Terminal 2. The North-west also had 12% of contract awards in 2017, with the Trafford Park Metrolink scheme estimated at £350m one of the leading contract awards.
Types of project
Residential had the highest proportion of contract awards by value in 2017 with 35% of the total. Major projects awarded included the Wembley Park development to provide 458 units with a completion date of 2020 and value estimated at £155m. In the North-west, the £135m redevelopment of the former BBC Broadcasting House site in Manchester will see the provision of 411 flats.
The second-largest sector was infrastructure with a 29% share of total contract awards value in 2017. Rail projects were a key feature for infrastructure in 2017, with the TransPennine Route and HS2 accounting for seven leading infrastructure contracts in 2017, with an estimated combined total of £9.4bn.
Construction performance by sector: spotlight on infrastructure
The West Midlands was the top location for infrastructure projects in 2017, with 20.4% of the total value of contracts awarded, helped by a number of HS2 contracts in the autumn totalling £3.7bn. These included the Long Itchington Wood Tunnels. London had the second-largest share of contract awards value in 2017, at 15.9%. Again an HS2 contract was the largest award with the £1.3bn Chiltern Tunnels contract.
While contract award growth was good, the value of projects reaching detail planning stage in 2017 fell by 7.2% since 2016, to £7.4bn. This indicates that the pipeline for 2018 is smaller than in previous years.
The outlook remains positive in terms of output, with HS2 likely to provide significant growth to 2022. The power and distribution sector should also provide impetus through a number of energy-from-waste contracts awarded in 2017, as well as the continued contribution from renewable energy schemes. The government has continued to support infrastructure expansion, with the announcement in the Budget of a £1.7bn Transforming Cities Fund to improve local transport connections as well as £385m for the development of 5G and full fibre broadband networks.
The pipeline for 2018 looks weaker but this is likely to be balanced by increases in construction output as stages of the larger-scale contracts are completed.
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