Record output, rising prices and full employment are threatening to overheat construction, but plunging stock markets may herald a big chill. Is it time to panic?
On Thursday 15 March, as the power elite of the construction and property industries networked in the Cannes sunshine, stock markets around the world went into freefall.

News of the slide in the share prices, and therefore the spending power, of their clients soon trickled through to the delegates. And as the rain began to fall, many of the 17,000 attendees began to wonder out loud if this year's MIPIM would be the last of the good times. "Things are just going to get worse from here on in for some time," predicted one.

Since then, there has been little to suggest that this gloomy forecast is wrong. On Tuesday this week, Aukett Group, the UK's only listed architect, told the City that its pre-tax profit would be less than half that of the previous year. It blamed a general lack of UK orders for the fall, and pointed in particular to the IT sector, which is the one most exposed to the slowdown in the US economy. The value of the USA's high-tech NASDAQ market has fallen 60% from its 2000 peak.

What has happened to the NASDAQ is being reproduced across the world's main markets: the FTSE 100 has shed 20% from its 2000 peak, and more than £100bn has disappeared from the London rating of blue chip stocks since the beginning of March. A week last Thursday, the index suffered its biggest one-day fall for more than 13 years, losing £52bn. What's more, the US Federal Reserve's decision to cut interest rates half a point to 5% seemed only to deepen the markets' gloom. More cuts are likely as economic growth grinds to a halt and consumer confidence dives.

All of which seems a little unreal from the point of view of the construction industry, which on the face of it is having an exemplary year. Firms are posting record profits while they graze contentedly on ample order books and the talk is all of expansion. Listed companies are worth more on the market than ever before and look set to be rerated even higher as investors reappraise old economy stocks.

Given this picture of prosperity, talk of a recession seems almost perverse. But most agree that, at the very least, growth will slow.

No one is questioning that it’s going to hit the UK, it’s just a matter of how hard

Barrie Tankel, Barrie Tankel Partnership, on the US slowdown

Barrie Tankel, chairman of QS Barrie Tankel Partnership says: "No one is questioning that it's going to hit the UK, it's just a matter of how hard." He adds that the real cause for concern is not what is happening to the markets now, but rather what it means for the year ahead.

Aukett Group's reports on the effect of the slowdown in the IT and telecommunications sectors is likely to affect some big construction projects touted for the UK. Two big international players have already announced that they are putting expansion on the backburner. Server farm outfit Digiplex is understood to have mothballed proposals to build a host of telehousing centres this year and co-location centre specialist Global Switch, which is part-owned by property company Chelsfield, will not develop as many bases as first predicted for 2001.

There are also serious doubts about Motorola's 46,500 m2 UK headquarters, planned for Farnborough Business Park in Hampshire, after the phone giant announced 7000 job cuts worldwide last week.

The paradox is that UK construction is in serious danger of overheating. Tender prices are outstripping the Retail Prices Index for the first time since the last boom – the Building Cost Information Service's latest figures for 2001 show tender price rises at 4-5% while the retail price index stands at 2.5% – and firms may find those healthy profits hit as they pay more for materials and labour but are unable to pass on these costs to clients.

Tankel for one believes that the rise in tender prices is an indication that a slowdown, if not a recession, may be on the way. He points out that it is the fifth time in the past 30 years that tender prices have leaped ahead of inflation. On three of the last four occasions, stretching back to 1973, a recession has followed. "It's as if the whole economy overheats to the point that it pushes up building costs," he says. "So that's obviously a worry now." Rab Bennetts, of architect Bennetts Associates, agrees that the risks of a slowdown are increasing all the time. He says a shortage of materials is pushing up prices, especially in southern England, where he thinks inflation is at least 8%.

Proceed with extreme caution and keep your workload short term

He points to the curtain-walling market, where the factories are booked up for two years. "That type of thing just sets the alarm bells ringing," Bennetts says. "There's no doubt the industry is very seriously overheating." However, there is no real consensus about what is happening now, never mind what the next few years will bring – which, you could argue, is itself a sign of the industry's disorientation.

Alastair Collins, partner in Davis Langdon & Everest, is upbeat about the industry's prospects. He says the very high level of pre-lets is a sign of continuing prosperity. "At the moment, it is business as usual." Collins adds that the huge public spend planned by Gordon Brown should offset any slowdown in the private and commercial sectors.

But like many others, he is quick to emphasise that "healthy caution" is needed. He is nervous about the sudden loss of confidence on the stock markets. He says: "So much of the ongoing investment in property and construction is down to confidence. Without that confidence, people will be looking quizzically when before they would have taken a punt." Businesses should be worried about the future because, he says, all the signals for a downturn are there. "It's like a blip on the radar screen, but at the moment we don't know if it's a friendly vessel or an iceberg." David Turnock, a director at architect and project manager Ruddle Wilkinson says that although there has been plenty of talk about the US slowdown hitting the UK, his firm has seen no sign of it yet.

He says: "There's still a lot of orders on the books and I can't see anything really changing unless the US ripple turns into a wave and swamps us too." Turnock says demand is still strong in all the sectors Ruddle Wilkinson is involved in, from offices to housing.

Martin Hewes, managing director of economic forecaster Hewes and Associates, does not entertain any such doubts. He dismisses claims that the UK will escape the US downturn as impossible: the USA accounts for one-third of world economic output. With this in mind, his latest report predicts that construction's commercial output will fall 7% to £9.6bn next year and 4.2% to £9.2bn in 2003.

Hewes predicts that construction output will decline in the next two years as the slowdown hits. Although there have been no noticeable effects yet, he believes that demand for offices and factories will be hit hardest as businesses consolidate rather than expand in the upcoming uncertain times.

Alistair McAlpine on how firms can ride out the storm

What goes up usually comes down and, as far as stocks are concerned, has in the past always gone up again. Given this, investors who have lived through the past couple of weeks must just sit and wait. Their fortunes will be restored, along with the reputations of those who run companies where the stock price is in danger of vanishing off the face of the earth. The stock market valuation of shares has little to do with the real value of a company. This can only be ascertained by taking a view on the company’s profitability, both now and in the future. And the only people who can take such a view of a construction company’s records and its future are the people who run it. Human nature being what it is, however, these people are hardly likely to be meticulous with the truth. As a result, when a crash starts, all you get from those running companies is good news. Such was the case in 1987 when a stock market crash led to a veritable boom, followed by the bleakest of recessions. When there is economic trouble about, you only need to look at one figure and that is company and personal debt. Banks are, as we know, very good at offering inappropriate umbrellas, always to hand when the sun is out, nowhere to be found when the rain comes. Banks, however friendly, do not take a long view where the money they have loaned is concerned. In the circle of booms and crashes the same people are seldom in charge twice: banks never learn from experience. As for government, running an economy is like driving a car. You need to be proactive rather than reactive. If you get into a skid, you drive out of it. Slap on the brakes or step on the accelerator and all is lost. The Americans are very good drivers of economies, the Europeans poor – and as for the Japanese, they should lose their licences for dangerous driving. So what should a builder do while all around is in mayhem? Proceed with extreme caution, listen to the talk of vast projects about to hit the market and if they do, smile as competitors take long-term contracts at low prices. Keep your workload short term; beware of commitments that stretch into the future. Do not cut prices to buy work – and tighten your belt, for there is a recession lurking in the wings. Also, don’t listen to market pundits and economists. If you want to know what the economy is doing, look at your business, watch the levels of traffic in the streets and the number of people shopping. Property will still rise in value as will many other investments, for when the stock market looks dodgy money finds other homes. Do not worry too much as you switch on your television to watch news of the overnight market fluctuation for it is all going to be all right. And if the past is any guide to the future, that is when it will really go wrong …