Construction Products Association economist Rebecca Larkin looks inside the latest CPA forecasts that predict continued growth in construction despite weakening signs in housing.

A strengthening economy and a construction recovery broadening across sectors have kept the near-term outlook for construction positive. Industry growth is set to continue over the long term, but recent international economic developments, and the upcoming general election, present additional elements of uncertainty.

Growth in the construction industry was estimated at 5.3 per cent for 2014, quickening from a modest 0.4 per cent increase in 2013. Over the past 12 months, some sectors have surprised on the upside – warehouses and public housing – whilst output reported in others, such as public health and education, remains weak. We forecast that the UK’s £119 billion construction industry will grow 5.3 per cent in 2015 and 4.2 per cent in 2016, driven by housing, offices and warehouses activity ramping up throughout the country. Near-term forecasts envisage growth in infrastructure, given peak work on large-value rail and energy projects.

This sustained upturn is not surprising as economic fundamentals have strengthened. UK GDP growth averaged 2.6 per cent in 2014, compared to 1.4 per cent for 2013, according to the ONS. Growth was underpinned by household consumption, business investment and increased activity in the manufacturing, construction and services sectors. Furthermore, increases in earnings began to outpace inflation in September, bringing long-awaited growth in real wages. This reflects the sharp slowdown in inflation, rather than a significant pickup in earnings, but lower cost pressures will add further support to household spending over 2015, nevertheless. Indeed, inflation in December matched a record low of 0.5 per cent, last seen in 2000, and is likely to delay any move from the Bank of England to raise interest rates.

The slowdown in inflation has been almost entirely due to the global drop in the price of oil, brought about by geopolitical factors related to production levels. At the start of 2014, Brent crude oil was $107 per barrel. It ended the year at $62 per barrel. Such an unforeseen decrease has undoubtedly shaken the markets and created a buzzword for the year: uncertainty.

The unexpected fall in oil surprised private sector forecasters and the World Bank, who were expecting prices to stay above $100 throughout 2014. Lower oil costs do produce some favourable side effects for the construction industry, including lower fuel costs for haulage and manufacturers of construction products. Manufacturing input prices were 6.5 per cent lower for 2014 as a whole. However, it is difficult to predict when the geopolitical stand-off between oil-producing countries will end and whether the next move in prices will be up, down or sideways.

Whilst the UK economy is entering 2015 on a firm footing, its biggest trade partner, the Eurozone, is not. Paltry growth rates in France, Germany and Italy and a slip into deflation for the entire Eurozone in December, if continued, risk delaying or cancelling investment intentions, which could spill over into the UK. European political risk has also intensified following the election result in Greece and the potential for further anti-austerity sentiment to feature in polls in other countries in 2015.

With a general election this year, uncertainty over politics is also a risk for the UK. Our forecasts make no assumption of the result on 7 May. Against the current backdrop of opinion polls, the growing possibility of no outright majority leaves a wide range of possible coalition partnerships. This suggests delays to funding decisions as negotiations take place, particularly if there is a change in party. Existing long-term contracts and frameworks for some public infrastructure work will limit the severity of any post-election hiatus in this sector, whilst other sectors such as health and education will be insulated to some extent by political populism. Progress on the Priority School Building Programme has been slow, with work on just 54 schools underway in October last year. The total number of schools accepted into the rebuild programme stands at 261 and it would require a brave new government to cancel it, given the four years of contraction or stagnation that occurred in publicly-financed school building following the cancellation of the Building Schools for the Future programme in 2010.

One area that may be subject to a hiatus in funding decisions is public housing. An increase in private sector house building is anticipated throughout the forecast period to 2018, albeit dependent on the return of SME builders. In contrast, our view is that constrained funding and a shift in focus to affordable housing provided by housing associations leaves public sector housing vulnerable to slowdown. Marginal growth of 1.0 per cent is forecast for public housing starts this year, with any delays to funding or contract awards expected to impact in 2016, when a similar-sized decline in starts is expected. The Affordable Homes Programme has a funding stream of just £0.96 billion per year available up to 2020, meaning housing associations will be increasingly reliant on private sources of finance.

Despite the uncertain elements, what we do know is that construction is well placed for continued growth over the next five years, with output projected to be 17.8 per cent higher by 2018.