With the double-dip recession deepening, the prospects for the construction industry have deteriorated, writes Milja Keijonen, economist at the Construction Products Association.

In the beginning of 2012, GDP forecasts ranged between 0.7 per cent and one per cent for 2012, yet the latest forecast from the IMF suggests the economy will grow by 0.2 per cent in 2012, whilst at the pessimistic end of the spectrum the view is that GDP will contract 0.5 per cent this year. Recent construction output data are starting to reflect what lies ahead, with output falling in both Q1 and Q2. With the cuts to the public sector capital budgets and private sector affected by the increasing uncertainty, construction output is forecast to fall by 4.5 per cent this year and a further 1.3 per cent in 2013 before growth returns in 2014.

The outlook for construction remains mixed near-term, both geographically and by sector, however. Large scale construction projects in greater London and the south east such as Crossrail continue to provide a healthy stream of work. In addition to commercial and housing developments in the region, sub-sectors such as electricity and rail are forecast to experience growth near-term. Outside these areas, however, prospects for the industry remain weak and areas in the north east and south west with a strong public sector presence are expected to be particularly badly affected.

Publicly-funded construction sectors are set to endure significant falls in output as drastic cuts to central government budgets take effect and cash-strapped local authorities cut back on investment. Public housing benefitted from a stimulus package introduced by the previous government but the cuts to the Department for Communities and Local Government capital budget are forecast to dampen prospects for new housing construction. Starts are expected to fall by 23 per cent in 2012 and by 10 per cent in 2013 before modest growth in 2014. Similarly, public non-housing output, which covers education and health, reached its record level in 2010 but the outlook is negative with double-digit falls anticipated in both 2012 and 2013. The Office for Budget Responsibility anticipates that public sector capital investment will fall from £62 billion in 2010/11 to £50 billion by 2015/16 with the implication that public sector construction will fall by 12 per cent in 2012 and a further seven per cent in 2013.

The hoped for private sector recovery was expected to offset these falls in public construction. However commercial, the largest construction sector, has been hit by the economic downturn and the prospects for 2012 have weakened considerably. Private sector construction output is predicted to fall by 0.7 per cent in 2012 and the expected falls in offices and retail output will only deepen the double-dip recession in construction. Offices construction, driven by demand for new office space and investor confidence, is predicted to fall by two per cent in 2012, whilst work on retail construction is set to contract by three per cent with deteriorating consumer confidence dampening prospects and supermarkets scaling back their expansion programmes.

The prospects for private housing, which accounts for 13 per cent of total construction, are mixed with large house builders reporting improved performance, whilst smaller market players continue to struggle with planning and access to finance. Government initiatives are expected to boost private housing construction in 2012. However, starts are projected to remain low compared with the long-term average rising to 103,800, a three per cent increase from 2011, before growth accelerates to nine per cent in 2013 and 11 per cent in 2014.

The infrastructure sector will be one of the bright spots over the otherwise gloomy construction horizon as investment in Britain’s ageing infrastructure continues. With around one fifth of the existing electricity generating capacity coming offline over the next decade, the Department for Energy and Climate Change estimates that £110 billion of new investment is required by 2020 to keep the lights on. In 2012, electricity output is predicted to rise by eight per cent with double-digit growth anticipated throughout the rest of the forecast period, driven by investment in nuclear and renewables.

Network Rail’s capital expenditure is fixed until 2014, whilst construction of Crossrail is progressing and activity is expected to peak between 2013 and 2015, with rail output forecast to grow until 2015. In July, the transport secretary announced £9.4 billion worth of additional investment in rail infrastructure that is expected to feed through to output towards the end of the forecast period.

The risks to these forecasts remain firmly on the downside with eurozone crisis showing little sign of relenting and with the continued weakness of the UK economy dampening prospects for construction near-term. Even without these risks, it has been a difficult 12 months for the industry and the signs are that the next 12 months won’t be any easier.