Companies and analysts look to government to take up the slack left by the fall in commercial work.
Analysts and industry figures are united in the view that only the government can maintain firms' workloads, profits and share prices in the coming year. There is a similar consensus that companies will suffer in proportion to their exposure to the moribund commercial and industrial markets (see graph).

Stockbroker KBC Peel Hunt summed up the mood by downgrading its expectations for firms oriented towards the commercial sector, such as multidisciplinary consultants WSP and White Young Green. Those that rely on public sector work, such as consultants Parkman and Mouchel, were not downgraded.

Stephen Rawlinson, an analyst with Old Mutual, said shares in Jarvis, Amec and Mowlem should perform well over the year as they would have a steady diet of government contracts. He said: "The government is starting to spend money on infrastructure. The first quarter is going to be tough, but it should pick up in the second as work starts to filter through."

Rawlinson warned that fit-out and M&E companies would find that work was harder to come by, as developers of speculative offices would not finish their buildings until tenants had been found.

He added that increased union activity had the potential to hold back the market.

Begbies Traynor, an insolvency practice, said it was expecting subcontractors to suffer as a result of the fall in demand for office space.

Economic consultant Construction Forecasting and Research said the government's commitment to transport, education, health and housing would translate into UK construction growth of 5% this year. That is down 2% from 2002, but is still 3.5% ahead of expected overall GDP growth.

Despite this, Mike Foster, an analyst with KBC Peel Hunt, said construction and blue-collar support services companies had not performed as had been expected. He said: "Our sector had been outperforming the market, but since the summer of 2002 there has been about a 10% shortfall in profits."

One traditional contractor added that he was expecting a mixed year as the recession starts to bite. He said: "The first six months, we have got a full order book. It's the next six that are the worry."

Despite the importance of government work, the market's concerns about the impact of the PFI seem sure to grow in 2003.

One analyst said: "Amey has shown that if you bid low for a PFI contract like a normal construction project you run the risk not only of the contract being zero value but of it being negative value. You're also stuck with it for 25 years."

The analyst added that the housing sector would be a worry. He said: "The new-build market is more volatile than the second hand, so if there is a downturn, it could be worse for housebuilders."

KBC Peel Hunt is upgrading expectations for housebuilders as a result of the lack of housing supply and continuing high demand. Privately owned developer the Miller Group said in a trading statement this week that any slowdown in the residential market would be restricted to London.

Miller argues that the market is being underpinned the dynamic labour market – unemployment is at its lowest level for 30 years – and by the strength of housing demand in the regions.

In the building materials sector, a similar opposition between the commercial and public sectors should emerge.

Mike Betts, an analyst at JP Morgan Chase, said sales of crushed rock would increase 3%, and that of ready-mixed concrete would fall 1%. Crushed rock tends to be used for road building and ready-mixed concrete for commercial buildings.

  • The Miller Group said its final results for the year to December 2002, to be released in March, would reveal the group's ninth successive year of profit growth and show a 15% increase in turnover.