Coming from a year of rapid growth in 2014, the construction industry was expecting growth to ease from 2015 onwards. Despite this, growth rates are still expected to remain relatively strong, according to the Construction Products Association’s (CPA) recent autumn forecast. Amandeep Bahra, an economist at the CPA, looks at how this growth is expected to pan out.

The CPA’s autumn forecast estimated that the construction industry will expand by 3.6 per cent in 2015 and 3.8 per cent in 2016. These forecasts have been marginally downgraded compared to the association’s forecast last summer primarily due to widespread weakness across the industry in the third quarter. But what has fuelled the recent slowdown, and is the construction industry beginning to run out of steam?

After two and a half years of sustained growth, the construction industry reported its first year-on-year decline in output, of 0.1 per cent in the third quarter, according to the Office for National Statistics (ONS). A breakdown into sectors shows that the industry’s two major engines appear to be displaying signs of weakness. Private housing posted the slowest year-on-year growth in Q3 since 2013 Q1, and on a quarterly basis, output declined 2.6 per cent. This fall can largely be explained by difficulties in recruiting on-site trades, which has not only added to the overall construction costs faced by house builders but also slowed down the pace of work. Nevertheless, house builders retain an optimistic view looking over the next 12–18 months, and we expect the sector to have grown by 10.0 per cent in 2015 and to grow by 5.0 per cent in 2016.

Public housing, on the contrary, continues to slide with the third quarter reporting an annual decline for the second consecutive quarter. Uncertainty over the future of affordable housing has inevitably impacted on public sector house building confidence. New orders were poor in 2014, and according to more recent data, the weakness in orders continued through 2015. As a result, public housing starts are forecast to decline 10.0 per cent in 2015 and 5.0 per cent in 2016 with no growth projected over the rest of the decade, largely as we see incentives for building by housing associations and local authorities gradually diminish.

Surprisingly, performance of the largest sector – commercial – has also exhibited signs of a slowdown as the impact of rising construction costs is also felt by developers in the sector. For the first time since the start of 2013, output in the commercial sector fell 2.0 per cent on a yearly basis in Q3 primarily due to declines in the retail and entertainment sub-sectors. Projects are reported to have been delayed as contractors wrangle over costs, which have risen since contracts were won.

Retailers go small for future success

In retail, the focus remains on smaller concept stores and so far this year, we have seen several retailers including Asda and the Co-operative announce expansion plans for convenience stores across London and the South East. Niche retail chains such as Costa have also set out five-year targets for store expansions across the UK, which will be seen through fit-outs of existing stores. Despite this, retail output is forecast to decline by 7.0 per cent in 2015 before we see a return to growth from 2016 onwards as larger projects such as the £440 million redevelopment of Oxford Westgate and £1 billion Croydon shopping development get underway.

Busy offices sector continues to perform

Offices, the largest commercial sub-sector, continues to perform well and will continue to drive growth over the rest of the forecast period as activity remains robust in London and picks up in cities such as Manchester and Birmingham. Birmingham in particular has attracted some of the largest projects outside of London, including the announcement by HSBC that it will be moving its headquarters to the city and pre-letting 210,000 sq. ft of new-build office space.

Although new orders in offices declined on an annual basis in the second quarter for the first time in two years, this is unlikely to divert the strength we expect to see over the medium-term. Growth of 8.0 per cent is forecast in 2015 followed by 7.0 per cent in 2016.

Return to growth expected from 2016

Overall, despite the slowdown in output growth in the commercial sector this year, growth is expected to return from 2016. Furthermore, by the end of the forecast period, output is expected to have increased 16.3 per cent and will reach a value of £27.6 billion in 2019.

The outlook for education construction continues to remain upbeat with growth of 3.6 per cent expected in 2015 before averaging a rate of 4.2 per cent each year between 2016 and 2019. Work under PF2 schools and higher education, which is benefitting from a stream of capital investments aimed at improving facilities, will support activity.

With house prices high and construction costs rising, major sectors are indeed feeling the pressure, and although this has translated into a slowdown in activity in the short-term and a marginal downgrade to our forecasts, the industry outlook still appears to be healthy for the next four years. With the project pipeline still strong, this will ensure that the industry’s engines are kept running, but let’s not overlook the concern over skills and capacity that will be at the forefront of the industry’s challenges over this period.