Spring optimism

01 Activity in May 2006

Construction activity expanded in May for the second month in a row, according to Experian Business Strategies’ latest nationwide survey of contractors. The overall activity index, incorporating responses across all UK regions and all three construction sectors, rose one point to 56 during the month – significantly higher than in March, when the industry stagnated and the index dropped to just 50 – and establishing it firmly in the increasing zone (above 50). Firms received an above-average number of tender enquiries and order books were significantly higher than usual. Employment prospects faltered in early 2006, but at 52 for the second consecutive month, May’s employment prospects index suggests firms are considering hiring over the next quarter.

The sectoral indicators showed a marked turnaround in May. Civil engineering activity contracted in May after a run of strong expansion wheras the residential sector enjoyed an upward swing for the first time since late 2005. Residential’s activity index climbed eight points to its highest level in since September 2005 and its orders and tender enquiries indices were similarly bullish. In contrast, the civil engineering index brought the opposite, its activity index plummeting 17 points to just 49. Less severe falls, but nevertheless significant, in its orders and tender enquiries indices suggest any downturn could be set to continue. The non-residential sector has so far performed solidly throughout 2006. In May activity expanded strongly, orders levels and tender enquiries were higher than usual.

02 Leading construction activity indicator

A further, more rapid expansion in construction output growth is not out of the question over the next quarter according to Experian Business Strategies’ Leading Construction Activity Indicator (See graphic "02 Leading construction activity indicator").

The index is forecast to rise from 56 in May to 57 in June where it will remain for the following two months, suggesting a positive outlook for the industry as a whole.

The current strength of order levels and tender enquiries is instrumental to our projection and reflects respondents’ optimism about the future.

03 Labour costs

Compared with three months ago, labour cost inflation has moderated in both the residential and non-residential sectors and in civil engineering. Across all three sectors, only 42% of respondents reported year-on-year labour cost inflation of 5% of less in February, but in May this increased to 59%. Only 24%

of residential and non-residential respondents reported labour cost increases of more than 7.6% and only 13% of civil engineering firms experienced rises of this magnitude. For 59% of residential and non-residential firms annual inflation fell into the 2.6-5% range, a little higher than the 52% of respondents in the civil engineering sector.

04 Regional perspective

In May the majority of regions reported composite indices, measuring activity, orders and tender enquiries over the past three months, of 50 or above, suggesting both an expansion in activity during the month and a positive outlook for the regions.

A five-point drop in the North-west’s index made it the exception. At 46, the index suggests activity actually declined there and as the regional composite index takes account of forward looking indicators, such as orders and tender enquiries, this indicates this subdued state is set to continue.

All other regional indices stood firmly above 50. Outside of the North-west, four regions’ composite indices fell, namely the East and West Midlands, Wales and Northern Ireland. The East and West Midland’s indices declined three and one point respectively, to 60 and 65. The Welsh indicator also declined three points, falling to 62. In Northern Ireland the fall was marginal and the index remained relatively high at 63.

After a period of uncertain and declining activity, Yorkshire and Humber has finally recovered. Its index increased substantially, climbing eight points from 49 in April to 57 in May. Increases were also seen in the North-east (one point), East Anglia (five points), South-east (two points) and South-west (three points). Scotland’s index stayed at 73.

The UK contractors’ index, incorporating responses from national contractors, rose one point to 73.