Government statistics suggest construction contracted 5% last quarter, but it’s hard to find anyone who believes that is true. Joey Gardiner argues the reality is actually more positive and presents alternative data to back up his case

Last month’s first quarter growth data from the Office of National Statistics has been almost universally ridiculed by construction leaders as overly pessimistic - a view backed up by a slew of trading updates in the last week from the major contractors and housebuilders. The ONS said the construction economy declined by 4.7% in the first three months of this year, which had the impact of almost halving the reported overall GDP growth figure for the UK.

“Baloney” was the phrase used by Kier chief executive Paul Sheffield, and the Construction Products Association has since backed his stance with a tough letter to the chancellor George Osborne stating that “few in the industry any longer have any confidence” in the official data. This follows last year, when the ONS reported record 7% growth that nobody was seeing.

It matters because the data is the basis on which the government and the Bank of England make decisions about macroeconomic policy such as interest rates, and specific interventions in particular areas. Michael Ankers, chief executive of the Construction Products Association (CPA), says: “The implications of inaccuracy for policymaking of this kind are extremely significant. None of this helps our industry play its part in delivering the Plan for Growth that was seen as such an important part of the [government’s] Budget statement.”

Economists think the errors are most likely to originate from a lag effect caused by the way the ONS, which in 2010 completely changed its construction data methodology, records output. This means the 4.7% decline recorded for the first quarter has probably more to do with the severe winter weather at the end of 2010.
John Morgan, executive chair of Morgan Sindall, says: “The industry is agreed that the figures for this year aren’t right. But they also weren’t right last year; the reality was that growth recorded then wasn’t really there. If you merge the two mistakes together they’re probably in around about the right place.”

So what’s really happening? While most areas are flat, commercial building in London and a small number of other key geographical markets are performing well, with Drivers Jonas Deloitte reporting last week that office building in London is at more than double the level of just six months ago - up 137%. In addition, private residential construction, particularly high end or in the South, and infrastructure, are both holding up well.

James Byrne, director of the UK arm of Irish housing-focused contractor Ardmore, which plans to turn over £300m in 2011, says: “Our experience is that business is up and we’re almost back to where we were at the peak in 2008. Tendering levels are huge, though admittedly conversion of those is not as high as it was, given increased competition.”

Even those in the social housing market, where the outlook is distinctly more pessimistic, and huge spending cuts are planned, haven’t experienced a fall - yet. Danny Durkan, chief executive of developer and contractor Durkan, says: “We don’t see any improvement this year. But it hasn’t got noticeably worse.”
But anecdotal evidence aside, the question remains how to prove the ONS has got it wrong - and so make sure government policymakers get the right information about what’s happening on the ground. If a 5% decline in output doesn’t match the reality we’re experiencing, what are the real figures? Taking the ONS data out of the equation, what other information is available that can reveal the state of the construction market?

Barbour ABI new orders

What does it measure?
New orders.

What does it say?
Compiled exclusively for Building by Barbour ABI and the CPA, the data shows orders in the first three months of 2011, for projects below £250m in value, were worth £17.8bn, a rise of 7.7% on the last quarter of 2010. There are similar results for individual sectors, with public housing projects below £50m rising by 22%.

What do people say about it?
Kelly Forrest, senior economist at the CPA, said: “The data shows contracts to grow warehousing or manufacturing capacity have increased significantly since the depths of the recession. The stability of the recovery in private housebuilding, however, remains a concern. Overall, with contract awards a little over 10% higher in Q1 2011 than Q4 2010, it wasn’t just contractors who were affected by the poor weather conditions in late 2010. The underlying trend in the data, however, is broadly flat.”

News analysis

CPA state of trade

What does it measure?
Construction product manufacturers’ sales.

What does it say?
A balance of 7% more manufacturers reported an increase in sales in the first quarter of last year than a loss. Twenty-two per cent more reported a rise on the same quarter in 2010. More of the growth was in heavy side materials, reflecting the strength of the civils sector. Demand remains the major constraint on growth.

What do people say about it?
Noble Francis, economics director at the CPA, says: “The survey highlights that the situation for construction product manufacturers remained challenging in the first quarter of 2011 yet this is a considerable improvement on Q4 2010. The scale of the fall in the official figures is extremely surprising and inconsistent with information from this survey and anecdotal evidence from the industry.”

News analysis

Construction purchasing managers’ index

What does it measure?
Construction sentiment.

What does it say?
The index of construction activity has been positive for every month since the start of the year - meaning construction output should, in theory, be growing. CIPS’ index, which rates growth on a scale between 0-100, with anything over 50 showing positive growth, has been at 56 for the last two months, indicating slow modest growth. In contrast, the index was below 50 in December, showing a small decline. The data shows that the housing and civil engineering sectors have been growing most quickly.

What do people say about it?
David Noble, chief executive officer at the Chartered Institute of Purchasing and Supply, says: “March saw the third monthly growth in a row of residential construction activity, and staff reduction was its weakest in many months; [but] other indicators showing continued volatility in house prices and poorer consumer confidence mean there is still a great deal of uncertainty.”

News analysis

NSCC state of trade survey

What does it measure?
Survey measures the state of trade for specialist contractors and subcontractors.

What does it say?
Thirty-nine per cent of specialists saw an increase in enquiries in the first quarter; 29% saw enquiries fall. More also saw a rise in new orders than a decrease, albeit by a smaller amount - 37% saw orders increase while 35% saw orders drop. Though small, this is the first positive improvement in the number of orders for three years in the National Specialist Contractors’ Council (NSCC) survey.

What do people say about it?
Suzannah Nichol, NSCC chief executive, says: “We were really surprised by the ONS data. Our survey shows Q1 has been relatively flat, certainly not down by 4.5%. If output had fallen by that much, our phones would have been ringing off the hook with worried members.”

News analysis

Construction trade survey

What does it measure?
Pan-industry sentiment, in a state of trade survey.

What does it say?
Due out next week, the report is expected to say that a balance of 28% more contractors, specialists and manufacturers thought that workload increased rather than decreased in the first three months of the year. In contrast, a balance of 36% think workload fell in the final quarter of 2010, as bad weather hit.

What do people say about it?
Stephen Ratcliffe, director of the UK Contractors Group, says: “The government figures are clearly wrong and have been out of sync since last January. Things are pretty flat for the big contractors, but they haven’t got worse.”

Source: CPA, UKCG, NSCC, FMB, CECA

Construction’s prospects

Simon Rawlinson

Simon Rawlinson, head of strategic research at EC Harris, takes stock and looks at what all the data means for the rest of the year.

Following the release of the deeply worrying construction output and GDP figures in April, quite rightly a great deal of well-informed comment has focused on the potentially misleading nature of this data - particularly the impact of lagging indicators related to output rather than lead indicators such as new orders.

Reports in the past week give greater grounds for confidence that demand is out there - albeit in specific sectors. Last week’s Drivers Jonas Deloitte London Office Crane Survey highlights a rapid turnaround in the commercial market - with 25 projects on site, lending support to the positive 4th quarter 2010 new orders data released in March and recent positive purchasing data for commercial construction.

However, looking to the future, there are many signs of a slowing of the economy, as per this week’s CBI economic forecast, which acknowledges that recovery will be gradual, reducing the 2011 GDP forecast to 1.7%. The CBI also notes positive signs in exports and investment - so it’s not all doom and gloom.

However, in the short term, the focus will inevitably be on the slowdown in the public sector, which will really start to hit from this April, and recent weakness in the housing market. The full effects of public sector spending cuts have not been seen yet, as an increase in 4th quarter new orders showed. The residential market also appears to have been affected by declining consumer confidence related to the cuts.

So yes, there are positive signs in the industry but these are quite sector-specific. We know that commercial is doing well but should wait until the June new orders release to get a broader and better picture of the industry’s medium-term prospects.