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Sun May 16 2021

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Political risk clouds construction growth forecasts

16 Oct 17 Construction activity will remain flat in 2018 but growth should return in 2019, according to latest forecasts from the Construction Products Association.

Growth in private sector house-building and infrastructure next year will be offset by a decline in the commercial offices, factories and the retail sector, the Construction Products Association (CPA) predicts.

Then in 2019, infrastructure projects will drive industry activity and propel construction output to grow by 2.0%.

Infrastructure activity is forecast to grow 25.4% by 2019 and will be due to major projects in rail and water & sewerage such as HS2 and the £4.2bn Thames Tideway Tunnel.

House-building will continue to be a primary driver of growth, with private housing starts rising by 5.0% in 2017 and 2.0% in 2018. In 2017 Q2 the government’s Help to Buy equity loan accounted for 40% of new homes and has been a significant policy for supporting building activity. The additional £10bn that government announced for the scheme in October 2017 will continue to sustain house building despite the slowdown in the general housing market.

The sharpest decline will be in the commercial sector, and particularly felt in the offices sub-sector as EU referendum-induced wariness among investors has led to a sharp fall in contract awards. Office construction is expected to decline 5.0% in 2017, worsening to a 15.0% decline in 2018, and is likely to accelerate if it proves to be the case that the UK will not be part of the Single Market and financial services firms choose to transfer operations out the UK into other EU member states.

Given the high degree of political risk attached to major infrastructure projects going ahead on time or at all, the forecasts are highly qualified.

“The importance of government delivery of the infrastructure work, which has been an issue in recent years, cannot be underestimated over the period of the forecasts. Without delivery of this infrastructure, construction output would fall by over 1.0% in 2018,” the 2017 autumn edition of the CPA's Construction Industry Forecasts 2017-2019 says.

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It continues: “In the medium-term, factors such as Brexit and works on towers following the tragic events at the Grenfell Tower will also need to be taken account of.

“These may also lead to structural changes within construction as the industry attempts to wrestle with issues of spikes in activity within certain specific sub-sectors whilst simultaneously dealing with capacity constraints on the labour and products side.”

CPA economics director Noble Francis said: “Construction activity is currently high, particularly in cities outside the capital such as Birmingham and Manchester. However, the forecasts highlight that the fall in construction new orders since the second half of 2016 is now starting to feed through to activity on the ground as projects signed up to pre-referendum end and are not being replaced. This is especially the case in key areas such as the construction of new commercial offices in London, where demand for new high profile office space from the financial sector has slowed considerably.

“The falls in commercial construction may be offset by growth in house building and infrastructure. In house building, government’s announcement of £10 billion of additional funding for Help to Buy is forecast to support growth. However, due to the slowdown in the general housing market, particularly in London, house building is only expected to grow by 2.2% in both 2018 and 2019.

“Infrastructure is expected to be major driver of construction activity in the next few years with work on major projects but the sector has been dogged by constant cost overruns and delays. Given that construction activity is forecast to be flat in 2018, if government cannot improve delivery of its infrastructure plans, construction output is likely to decline next year.”

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