Recovery set to continue after surprise slowdown

Predicting the economic future is not an exact science and, as last year showed, it is easy to be well wide of the mark.

The truth is that 2006 did not deliver the growth expected. Market analyst Experian has retrospectively revised its forecast for last year to 0.9% from 2.9%. This was mainly because of the poor performance of the repair, maintenance and improvement (RMI) market (see below). However the recovery seen in the second half of 2006 is likely to continue in 2007 with construction output estimated to grow 2.5%, rising to 3% in 2009.

UK economy

Looking at the wider picture, the UK economy is forecast to see stable growth of 2.5% over the next three to five years, although consumer spending, the main driver of the UK’s economy over the past few years, will level off. Analysts are divided over whether the Bank of England will raise interest rates soon. Some believe a rise could come in February, but Experian says it is too early to tell.

There are some clouds on the horizon.

The UK housing market could go into retreat after years of strong growth. Consumer confidence may also drop. In addition, there are concerns about a slowdown in the US that would have a knock-on effect in the UK.

Public sector spending

Public spending is to remain high. In his pre-Budget report the chancellor committed the government to £48bn worth of expenditure on roads, rail, schools, housing and hospitals.

Experian believes infrastructure will be an engine of growth as last year’s increase in orders feeds into output. Public sector non-residential work suffered a decline last year, but 2007 looks better. Building Schools for the Future should generate significant construction activity but there will be weaker demand for health projects.

Looking to next year and beyond Experian says that the 2007 Comprehensive Spending Review will herald a more “constrained period of public investment than in the recent past”. Spending will probably decline in real terms in 2008 and 2009.

Public sector housing

Public sector housing bounced back in 2006 and Experian expects output to increase 27% to £2.3bn. There is further scope for growth this year thanks to the high levels of public funding and the demands on social housing landlords. The market analyst forecasts a 10% output increase to £2.5bn.

Experian says other drivers in public sector housing include the growth in the capital funding of the Housing Corporation. This is set to rise by nearly 12% in 2006/07 to £1.8bn. It will rise 7% to £2bn in the following year.

Repair, maintenance and improvement

RMI accounts for almost half of construction output, so its poor performance in 2006 had a big impact. Unfortunately this decline is set to continue in 2007 owing to reduced spending by public sector bodies.

Experian thinks the residential sector may pick up in 2009 as authorities try to meet their obligations under the Decent Homes for All scheme, and similar programmes are under way in Scotland and Wales. Experian predicts housing RMI will fall 2.5% for 2006 (to £18.8bn) and decrease a further 1.5% (to £18.5bn) in 2007. Non-residential RMI performed better in 2006, up 2.1% to £18.6bn though this is predicted to fall 2.8% in 2007 to £18bn.

Private sector housing

The housing market was stronger than predicted in 2006 and despite a quarter point rise in interest rates in November, to 5%, forecasters are predicting another strong year.

The RICS expects prices to grow 7% over the next 12 months. This chimes with the Nationwide’s view that house prices will rise 5-8%. The threat of another interest rise has prompted both organisations to warn of a slowdown but this will have little effect on prices as demand will outstrip supply.

Experian predicts that total housing starts will have risen 3% in 2006 (to 219,000) with completions up almost 4% to 199,000.

Growth in private housing output was estimated to rise 2% to £11.4bn and remain at the same levels this year.