Slower UK economic growth has led to a downward revision in the latest forecast for UK construction growth from the Construction Products Association.

Its autumn estimate was 3.8% for UK construction growth, but the latest forecast from the UK association estimates growth for the construction industry of 3.6% in 2016.

It said, however, that the forecast horizon remained positive, largely as a result of the inclusion of HS2 (high-speed rail) main works for the first time. On the other hand, risks that threaten construction activity have intensified, it said, particularly from weakening global economic growth, the upcoming EU referendum in the UK, and skills shortages.

The Construction Products Association said that total construction output was forecast to rise 3.6% in 2016, and 4.1% in 2017. It expects private housing to begin rising, by 5.0% in both 2016 and 2017. Industrial activity is predicted to increase 21.3% by 2019.

It forecast office construction to increase 7.0% in 2016 and 2017, while infrastructure work is expected to rise 56.9% by 2019.

Balanced

Professor Noble Francis, economics director at the Construction Products Association, said, “The key fundamentals for the sector are generally positive, and construction growth is set to be more balanced.

“Private housing work, especially in London and the South East, provided the majority of growth between 2012 and 2015. During this forecast period, however, all three of the largest construction sectors – private housing, commercial and infrastructure – are expected to drive industry activity.”

He said that private housing starts would be buoyed by a high latent demand for home ownership, which would be enabled through rising mortgage lending and policies from government.

“The demand-side policies, in particular, will fuel house price inflation further,” he said, “especially in the capital, while also incentivising major house builders to increase building rates over the next 12 to 18 months.”

“In addition, given all the government assistance to boost the housing market, house builders are likely to be under pressure to increase supply throughout parliament.

He said that public housing prospects continued to be poor. He said housing associations would be adversely affected by a lack of funding, as rental income would be hit by the extension of the government’s Right to Buy scheme, and cuts to social rent. Public housing starts were expected to fall a further 5.0% in 2016 and no significant growth was expected over the forecast period.

Professor Francis said, “The commercial sector is forecast to improve 3.7% on average per year through to 2019. New offices construction will lead activity in the sector, increasing 7.0% in 2016 and 2017, due to a flurry of high profile developments in London, Birmingham and Manchester.

“Retail construction, on the other hand, is expected to remain flat in 2016 and only rise 2.0% in 2017.”

He said that the infrastructure sector was set to stand out, rising 56.9% by 2019 owing to substantial activity in the rail, energy, roads, water and sewerage sub-sectors.

“Major projects across the sector will add to generally improving work levels. Rail work will primarily be driven by Network Rail activity but also boosted by HS2, which the CPA has now included in its forecasts.

“In previous forecasts, uncertainty regarding its cost, planning and timing caused it to be excluded.”

Significant risks

Professor Francis said that there were significant risks to this latest forecast, however.

“First is the uncertainty regarding global economic prospects. The chief concern remains weakness in China and the effect it can have on other countries.

“Second is the EU Referendum, likely due this year. While we make no assumption about the result, we note the uncertainty around the issue is already affecting investment decisions.”

He added, “Third and perhaps of most importance for the industry is the urgent challenge around skills shortages. The availability and cost of skilled labour has clearly impacted the house building sector – the recovery in other sectors is already showing a similar vulnerability.”

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