Downgraded forecasts for UK construction

Downgrades in the Construction Products Association’s (CPA) forecasts for growth in the UK’s construction sector have been prompted by Brexit uncertainty and infrastructure delays.

According to the association’s autumn forecasts, overall growth in the industry is expected to remain flat in 2018, rising by only 0.1%, and then increasing by just 0.6% in 2019. This represents a downward revision of the previous estimate of 2%.

Noble Francis, economics director at the CPA, said, “Overall, we are still expecting construction output to increase next year but this growth is highly dependent on house building outside London and also major infrastructure projects offsetting falls in activity in other sectors.”

Despite the weakened market, it was said that housing continues to be a key sector of growth for the industry, with first-time buyer demand enabled by the government’s Help to Buy scheme encouraging activity. Over the past 12 months, the equity loan accounted for almost one third of all housebuilding sales, according to the CPA, which has particularly sustained demand for housebuilding in the North and Midlands, offsetting falls in London and the South East.

Based on the assumption that the government will extend funding for the scheme beyond 2021, the sector’s output is forecast to rise by 5% in 2018 and by 2% in 2019. However, without such an extension, it is predicted that housing starts would begin to decline from 2019.

The CPA said the infrastructure sector remains a primary driver of growth, with output forecast to hit a historic high of £23 billion (€26.11 billion) by 2020, driven by ambitious schemes such as the HS2 high-speed rail project and Hinkley Point C nuclear power station. However, there remain concerns about the government’s ability to deliver major infrastructure projects without the cost of overruns and delays, as has been the case recently with a nine-month delay in the Crossrail rail line, which is costing £600 million (€680.95 million) in overruns.

As a result, caution surrounds the forecast, with growth in the sector revised down to 8.7% in 2019, from the previous forecast of 13%.

Brexit uncertainty continuing to drive expectations for the sharpest construction decline in the commercial sector, according to the CPA. This is particularly true for the offices sub-sector. It was said that investors have signalled that uncertainty is too great to justify significant up-front investment in new floor space for a long-term rate of return.

In light of this, output has been forecast to fall by 10% in 2018 and then a further 20% in 2019.

Francis said, “The forecasts assume that the UK and EU will agree a deal on Brexit towards the end of the year, but the continued uncertainty over a ‘No Deal’ Brexit has already had a big impact on construction new orders in construction sectors dependent on high upfront, often international, investment for a long-term rate of return.”

Even if a deal is agreed upon, it is expected that construction output will fall sharply in 2019 due to falls in new orders, which have already occurred over the past 18 months, feeding through to activity on the ground.

Francis added, “Looking on the positive side, if the government is able to reduce the uncertainty sooner rather than later and improve delivery of major projects, to time and budget, then the risks to the forecasts are on the positive.”