The UK economy is on the path to recovery, and construction, which hit the wall in 2008 in the aftermath of the financial crisis, is slowly gathering pace. The UK’s third biggest sector has lost more £60 billion in output, but forecasts show some green shoots emerging. Kallum Pickering of the Construction Products Association says output in 2013 is set to fall on an annual basis, but a gradual return to health toward the end of the year should raise growth prospects from 2014 onwards.
Macroeconomic forecasters in the years since the crisis have been notoriously unreliable, with leading analysts repeatedly admitting unforeseen setbacks and downgrades. But finally, it’s safe to say that the early signs of a recovery are emerging. First and second quarter growth was 0.3 per cent and 0.7 per cent respectively and momentum appears to be gathering. Our forecasts expect 1.2 per cent GDP growth for the year and for 2014 and 2015, 1.7 per cent and two per cent respectively. Fixed investment growth at five per cent annually should drive medium term growth from next year onwards, but high inflation is likely to constrain consumer expenditure growth of only 1.2 per cent in 2013, 1.7 per cent in 2014 and two per cent in 2015.
Total construction output is expected to fall 1.5 per cent in 2013 after contracting eight per cent last year. Although the year is expected to decline overall, it is very likely that the nadir was reached in the first quarter as recent data suggest that the industry is beginning to grow; July recorded 2.2 per cent growth on the previous month. Wider economic growth alongside private sector expansion should enable these green shoots to manifest into stronger growth over the medium term.
Despite recently hitting the headlines for all of the wrong reasons, private housing is likely to be the most influential sector in the near-term. Growth in housing has been strong since the hotly debated Help to Buy policy was announced in the spending round; starts in Q2 were up 34 per cent. The combined effects of Funding for Lending, First Buy and Help to Buy have generated renewed optimism in private housing and starts are forecast to grow 15 per cent in 2013 and 10 per cent in 2014.
Infrastructure output declined 13 per cent in 2012 despite several big announcements by government. Continued work on Crossrail, Europe’s largest construction project, should prime rail growth of 41 per cent between 2013 and 2017. Nuclear investment could have a profound effect on the UK energy mix and be a significant boost for the sector if a strike price is agreed at Hinkley point C. The start of main works in nuclear should occur in 2014 alongside Round 3 offshore wind. A record fraught with delays should temper any excessive optimism over energy investment given that government has consistently over-promised on infrastructure while grossly under-delivering on the ground. Despite these uncertainties, infrastructure is still set to grow 5.8 per cent this year, 7.7 per cent in 2014 and 9.2 per cent in 2015.
Recent orders data restated concerns over commercial output in the near term. Worth £22 billion annually, and the largest overall of the private sectors, it is set to endure the slowest recovery. Sharp falls in business investment and weak real income growth have choked demand in offices and retail respectively and, as a consequence, output fell 13 per cent in 2012. This year output is set to contract a further 6.7 per cent. Output is expected to remain broadly flat next year, but 2015 should be a turning point with growth forecast at 4.9 per cent.
Despite manufacturing failing to revive the UK economy as the coalition might have hoped, industrial output grew three per cent last year from an historic low due to strong factories growth as a result of expansions by two key exporters. Another 15 per cent should be added to sub-sector output this year and overall sector growth should hit 3.3 per cent; thereafter, growth is forecast at 3.9 per cent in 2014 and 4.6 per cent in 2015. Similar growth is expected for private RM&I over the forecast period; two per cent in this year, three per cent next year and thereafter, rates upwards of four per cent.
A recovery in construction rests almost entirely upon private sector growth. Businesses have little confidence in the government’s ability to deliver given past failures, and this is reflected by the weak forecast for public construction sectors. This is a critical point in the recovery and all three major sectors; services, manufacturing and construction need to be firing on all cylinders if balanced and stable growth is to take place. If the UK construction recovery stalls it could have serious implications for the underlying momentum of the whole economy, causing imbalances which ultimately will lead to weaker long-term growth