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Thu November 15 2018

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Doubts and delays prompt downgrade in construction forecasts

15 Oct Growth forecasts for the UK’s construction sector in 2019 have been downgraded amid signs Brexit uncertainty and on-going delays in the delivery of major infrastructure projects are weighing on activity.

Crossrail delays have prompted a downgrade in forecasted infrastructure growth
Crossrail delays have prompted a downgrade in forecasted infrastructure growth

The Construction Products Association’s autumn forecasts anticipate growth will remain flat in 2018, and rise by only 0.6% in 2019, a substantial downward revision from its previous estimate of a 2.3% increase.

Despite a weakened market, private housing continues to be a key sector of growth for the construction industry, with first-time buyer demand propped up by the government’s Help to Buy scheme. Over the last 12 months, the equity loan accounted for almost one third of all housebuilding sales. It has particularly sustained demand for house-building in the north and Midlands which has offset falls in London and the southeast. The house-building sector’s output is forecast to rise 5% in 2018 and 2% in 2019 – although this assumes government will extend funding for the scheme beyond 2021. Without an extension, housing starts are expected to start declining from 2019.

The infrastructure sector also remains a primary driver of growth for the whole construction industry, with output forecast to hit a historic high of £23bn by 2020, thanks to HS2 and Hinkley Point C. However, the delays and cost overruns seen on Crossrail recently have given the economists at the Construction Products Association (CPA) doubts about whether these other major infrastructure projects can be delivered without cost overruns and delays. It therefore sounds a note of caution and has downgraded growth in the infrastructure sector to 8.7% for 2019, down from its previous forecast of 13%.

Brexit uncertainties lie behind a sharp decline in the commercial sector, particularly felt in the offices sub-sector. With speculators reluctant to invest in new floor space, output is expected to fall by 10% in 2018 and a further 20% in 2019 in this sector.

CPA economics director Noble Francis said: “Construction continues apace in some sectors such as house-building, particularly in key hotspots of activity such as Manchester and Salford. Overall, we are still expecting construction output to increase next year but this growth is highly dependent on house building outside London and also major infrastructure projects offsetting falls in activity in other sectors.

“The forecasts assume that the UK and EU will agree a deal on Brexit towards the end of the year but the continued uncertainty over a ‘No Deal’ Brexit has already had a big impact on construction new orders in construction sectors dependent on high upfront, often international, investment for a long-term rate of return. These include the construction of prime residential in London, industrial factories and commercial offices towers. Even if the UK government eventually agrees a deal with the EU on Brexit, construction output in all these sectors is expected to fall sharply during 2019 due to falls in new orders, which have already occurred in the past 18 months, feeding through to activity on the ground.

“Major infrastructure projects are expected to drive industry growth in 2019 and 2020 but the £600m cost overruns and nine-month delays to Crossrail add to existing concerns about government’s ability to deliver major projects and lead to additional concerns about the delivery of already delayed projects such as Hinkley Point C and HS2. As a result, we have had to significantly revise down our construction forecasts for the infrastructure sector and overall.

“Looking on the positive side, if the government is able to reduce the uncertainty sooner rather than later and improve delivery of major projects, to time and budget, then the risks to the forecasts are on the positive.”

MPU

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