Commercial development re-enters decline, Spending cuts hit contractor confidence, Job losses could reach 100,000 this year
Industry jitters grew this week as analysts warned firms that they faced more job cuts, weak growth, insolvencies and the increasing likelihood of a relapse into recession.
This follows last week’s unexpectedly severe cutting of the £55bn Building Schools for the Future (BSF) programme, and figures from the housing and commercial sectors that suggest private sector confidence in the economy is falling again.
Two-thirds of our members think a double-dip recession is highly likely
Brian Berry, FMB
Figures released this week by property consultant Savills showed that total commercial development declined in June at the fastest rate for almost a year, following two months of growth. In addition, the RICS said most surveyors believed house prices would fall in the coming months.
David Noble, chief executive of the Chartered Institute of Purchasing and Supply, said: “The risk of a W-shaped recession is still very much with us. Our indices showed this month that confidence among contractors fell to the greatest extent in our survey’s history.”
He added: “We wait with bated breath to see how construction will cope with the obstacles it faces - public sector cuts, VAT rises and possibly interest rises before then.”
Meanwhile, Geoffrey Dicks, head of economic forecasting at the Office of Budgetary Responsibility, told a committee of MPs that the coalition’s decisions to cut spending have “logically increased the possibility of a double dip”.
Brian Berry, director of external affairs at the Federation of Master Builders, said: “Two thirds of our members think a double-dip is highly likely, because of the government’s economic policy and because we’re struggling to recover from 2008.”
However, an analysis by the Construction Products Association (below) shows that the cancellation of BSF would not significantly affect the 1% growth in construction output that is predicted for next year, unless there were a sudden drop in consumer confidence.
Regardless of whether the UK returns to recession, the construction sector can still expect further job losses and insolvencies, said James Hastings, head of construction futures at economic forecaster Experian.
He said: “Insolvencies tend to rise at the end of a downturn, when firms can’t hold on any more.” He predicted that the industry would shed another 50,000-100,000 jobs this year, and a further 20,000-30,000 in 2011.
However, employment figures released by the Office for National Statistics showed that 63,000 construction jobs were lost in the first three months of the year alone.
Simon Rubinsohn, chief economist at the RICS, said he predicted growth of 1.2% in 2010, rising to 2% in 2011. He said: “We probably will escape, but the challenges are serious. A weak period of growth would be almost as bad as a double dip. With Kickstart likely to go, the housing recovery could run out of steam.”
The Office of National Statistics is today due to publish figures on construction output that will show how the industry has fared in the first half of 2010.
A history lesson
The UK has never recorded a double-dip recession, but the US experienced a savage one in the eighties. Like today, the US was struggling with a huge budget deficit and fell into a recession for the first six months of 1980. It then started to pull out and during the first three months of 1981 was recording a growth rate of 8%. The Federal Reserve then raised interest rates to fight inflation and the economy dipped back into recession for the next year.
So what is the lesson? Well, our current growth is far from 8% - most economists regard our 0.3% growth as basically zero. That means inflation is not a problem and interest rates can be kept low. But it also means the current fiscal action - cuts - is being taken before growth has even started. Last week the New York Times offered its opinion from across the Atlantic: “No reputable economic theory justifies this bleeding.”