On Friday the Office for National Statistics (ONS) reported that construction industry output in Great Britain was estimated to have decreased by 0.3% in February 2016, marking the second successive month of shrinkage.
Commentators attributed this to uncertainty surrounding the forthcoming referendum on UK membership of the European Union.
"We're hearing increasing reports of significant commercial projects being placed on hold as major investors get nervous about the impending vote,” said Lorraine Macphail, Grant Thornton's head of property and construction in Scotland.
“Construction is an industry that is particularly sensitive to fluctuations in confidence and the forthcoming referendum seems to be having a negative impact on business owners and consumers alike,” said Sarah McMonagle, head of external affairs at the Federation of Master Builders. “Much in the same way as the Scottish independence vote weighed on industry confidence back in September 2014, hesitance over investment will likely prevail until we know the result on 23rd June. This isn’t a precipitous drop, but after the prolonged downturn experienced by our sector following the financial crisis, these results are disappointing. We can only hope that this contraction is a blip rather than a prolonged decrease in construction output.”
Within new work, the ONS said that there had been month-on-month decreases in all work types in February, except private new housing. Within repair and maintenance (R&M) there were falls in all work types except public housing R&M.
Compared with February 2015, output in the construction industry increased by 0.3%. All new work was flat while there was an increase of 0.8% in repair and maintenance.
Comparing the three months, December 2015 to February 2016, with the previous 3 months, September 2015 to November 2015, construction output increased by 1.5%. All new work increased by 2.5% while there was a fall of 0.3% in repair and maintenance.
On the back of this, the Construction Products Association (CPA) now forecasts 3.0% growth in construction output during 2016 and 3.6% in 2017, a downward revision from the 3.6% growth forecast three months ago.
The CPA put this down to constraints of skills shortages as well as investor uncertainty over the EU referendum.
Just six months ago CPA economists were forecasting 4.2% growth for 2016. They cut this in November (to 3.8%), then February (3.6%) and now April. The latest cut is the steepest of the CPA’s latest three downgrades.
The CPA has also cut its forecast for 2017, down to 3.6% growth. Just two months ago it was forecasting 4.1% growth for 2017.
CPA Spring Forecast
The headline for the Construction Products Association 2016 Spring Forecast is a 3.0% rise in construction output in 2016 and 3.6% in 2017.
Other highlights include:
• Private housing starts expected to rise 5.0% in both 2016 and 2017
• New offices activity anticipated to increase 7.0% in 2016 and 6.0% in 2017
• Retail construction expected to fall 1.0% in 2016 and only rise 2.0% in 2017
• Warehouses activity forecast to increase 23.7% by 2019
• Infrastructure work is anticipated to rise 56.3% by 2019.
CPA economics director Noble Francis said: “The latest forecasts for construction are still positive. With growth of 3.0% in 2016 and 3.6% in 2017, activity in the construction industry is expected to outpace growth in the wider UK economy. The risks to this growth, however, continue to rise. UK economic growth forecasts continue to be downgraded in light of poorer global economic growth prospects. In addition, the months leading up to the EU referendum in June will inevitably see a drop off in investment as increased uncertainty leads nervous investors to adopt a ‘wait and see’ policy until the referendum is out of the way, which could have a significant impact on UK economic growth and the construction sector in particular. “
Despite these risks, the CPA is anticipating growth in the three largest construction sectors: private housing, commercial and infrastructure.
“Private housing starts are forecast to rise 5.0% in 2016 and 2017, with major house builders keen to take advantage of high demand for home ownership and government policies that attempt to deal with issues around affordability,” Professor Francis said. “After a spike in property transactions in Q1 owing to April’s increase in stamp duty for buy-to-lets and second homes, however, don’t be surprised to see a fall in property transactions in Q2. That shouldn’t affect the general housing market medium-term, as the return on investment in property remains considerable.”
He continued: “Work in the commercial offices sector is forecast to grow by 7.0% in 2016 and a further 6.0% in 2017 due to major high profile developments currently in the pipeline, not just in London but also Birmingham and Manchester too. Retail construction, on the other hand, is expected to fall 1.0% in 2016 and only rise 2.0% in 2017 as major supermarket chains consolidate, focusing more on small convenience stores where sales margins are higher. In addition, general retail is expected to suffer from the continuing shift away from high street shopping to the internet. Whilst this shift adversely affects retail construction, it does boost industrial warehouses construction, which is expected to increase 10.0% in 2016 and a further 5.0% in 2017.
“Infrastructure work is forecast to rise 56.3% by 2019 due to growth in rail, energy, roads, water and sewerage; however, there are key issues in the medium-term. The most pressing issue is whether the wider construction industry actually has the skills available to deal with double-digit growth in the infrastructure, commercial and private sectors at the same time. By 2019, total construction output is expected to be £20 billion higher than in 2015, yet employment in the industry remains 324,000 lower than it was over seven years ago. If the growth we have forecast is to be achieved then the serious issue of skills shortages needs to be addressed.”