Fall in construction sector output of 3% in first quarter 2012 drags economy back into recession

The UK economy is officially in recession, again, after economic data for the first quarter of this year showed GDP fell by 0.2%, dragged down by a fall in construction sector output of 3%.

The Office for National Statistics figures showed the economy contracted by 0.2% in the first three months of 2012, with construction sector output down 3% following a 0.2% fall the previous quarter.

As the latest figures represent a second consecutive quarter of GDP contraction, the figures mean the economy is once more in technical recession.

The ONS’ preliminary estimate of GDP only includes hard data for January and February, requiring statisticians to “take a view” on March’s figure for the whole-quarter estimate for the construction sector.

It said today that March’s figure would need to be an “exceptionally strong” 40% increase on February to result in a revision that would see positive growth for the sector.

Instead, the ONS said that a revised estimate based on previous years’ February-to-March performance would likely result in a downgrade to -4% growth, while weaker than usual March figures could see growth revised down to -5 or -6%.

Comparing this year’s January-to-March construction figures with last year’s, Q1 output decreased by 0.5%.

The ONS said output in the production sector decreased by 0.4% in the first quarter of the year, a slowing of its 1.3% decline in the fourth quarter of 2011.

In volume terms GDP was said to be “flat” comparing the first quarter of 2012 with the same quarter last year.

For more on the GDP figures see Brian Green’s Brickonomics blog

Simon Rawlinson, head of strategic research at EC Harris, said: “The latest GDP figures are clearly very disappointing. Construction was -3% for Q1 2012 and coupled with a revised figure of -2% for Q4 2011 means that the industry has contracted by 5% over the last half year. We have effectively lost the gains that were made in 2011 and repeated the pattern of 2010 when we saw a loss of 9.3% over a six month period.

“Most of the damage was down to poor performance during December and January, which is also a recurring trend to the previous year, when after a poor Q4 and Q1, the rest of the year we played catch up.

“Whilst it is impossible to say exactly where the drop has come from, if you look at the last construction output data, infrastructure was the only area that showed growth, with everything else static or falling. It is likely that the public sector spending cuts are reflected in this figure however.”

Noble Francis, Construction Products Association economics director said: “Given the sharp effects of public sector spending cuts over the past 12 months it is unsurprising to see that construction returned to recession in the first quarter with a fall of 3% following the 0.2% fall in Q4.

“Furthermore, with new orders for construction falling 14% in 2011, the industry is likely to endure further falls near-term. Our latest forecasts for construction anticipate that the industry will fall considerably this year and remain flat in 2013, severely delaying recovery for the economy as a whole.

“Given that independent economic analysis has shown clearly that for every £ spent in construction, £2.84 is generated for the wider economy, it is essential that government does its utmost to switch its current spending towards the more productive capital spending.’

Brian Berry, Federation of Master Builders chief executive, said: “The Government will find it very difficult to get sustained growth in the economy while the construction industry remains depressed.

“Construction is essential to the wellbeing of the wider economy because of the variety and quantity of job it creates from apprentice bricklayers to world leading architects.

“Steps the Government could take now to stimulate construction to help create jobs in the economy should include abandoning its plans to introduce VAT on heritage building; cut VAT on property repairs; take action on banks that discriminate against construction firms and their clients; open up public sector procurement to small firms; and introduce meaningful incentives to drive private domestic retrofitting.

“It’s a sad fact that the building industry has been in recession for four years with little hope of any immediate recovery. Until we get builders building again the economy is not going to recover. The construction industry holds the key to recovery which is why the Government needs to invest in capital projects rather than just focusing its attention on budget cuts.”