UK outlook flat

18 October 2017

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UK growth will be reliant on infrastructure delivery

Escaping the impact that subdued economic growth, rising inflation and falling real wages will have on the UK construction industry over the next two years will be difficult, the latest forecasts from the UK’s Construction Products Association (CPA) suggest.

It added that negotiating “unprecedented uncertainties” as the UK leaves the EU was expected to result in little growth, with output expected to rise 0.7% in 2017 and remain flat in 2018.

Meanwhile, figures from the Office for National Statistics (ONS) for Great Britain have showed that construction output contracted by 0.8% in the three months to August 2017 over the previous quarter, but the ONS said the figures remained at relatively high levels.

The CPA forecasts were said to have come at a time where any growth at all would be reliant on the UK government’s delivery of infrastructure projects. This was said to be likely to have a profound effect on construction output, which if not realised would lead to an industry-wide decline of over 1.0% in 2018.

Infrastructure activity was forecast to grow 25.4% by 2019 and it was said that this would be a result of major projects in rail, and water and sewerage­ – such as the HS2 high speed rail line, and the £4.2 billion (€4.71 billion) Thames Tideway Tunnel sewerage system.

The CPA said that housebuilding would continue to be a primary driver of growth, with private housing starts rising by 5.0% in 2017 and 2.0% in 2018.

A tunnel boring machine in the Lee Tunnel - which will connect with the Thames Tideway Tunnel in London

A tunnel boring machine in the Lee Tunnel - which will connect with the Thames Tideway Tunnel in London

It said that in the second quarter of 2017, the UK government’s Help to Buy equity loan accounted for 40% of new homes and had been a significant policy for supporting building activity. The additional £10 billion (€11.21) that the government announced for the scheme in October will continue to sustain house building despite the slowdown in the general housing market, according to the CPA.

It forecast that the sharpest decline would be in the commercial sector, and would be particularly felt in the offices sub-sector as EU referendum-induced wariness among investors had led to a sharp fall in contract awards. Office construction is expected to decline 5.0% in 2017, worsening to a 15.0% decline in 2018. The CPA said this was likely to accelerate if it proved to be the case that the UK would not be part of the Single Market, and financial services firms chose to transfer operations out the UK into other EU member states.

Activity high

Noble Francis, the CPA’s economics director, said, “Construction activity is currently high, particularly in cities outside the capital such as Birmingham and Manchester.

“However, the forecasts highlight that the fall in construction new orders since the second half of 2016 is now starting to feed through to activity on the ground, as projects signed up to pre-referendum end and are not being replaced.”

He said this was especially the case in key areas such as the construction of new commercial offices in London, where demand for new high-profile office space from the financial sector had slowed considerably.

“The falls in commercial construction,” said Francis, “may be offset by growth in housebuilding and infrastructure. In housebuilding, government’s announcement of £10 billion of additional funding for Help to Buy is forecast to support growth. However, due to the slowdown in the general housing market, particularly in London, housebuilding is only expected to grow by 2.2% in both 2018 and 2019.”

He said that infrastructure was expected to be major driver of construction activity in the next few years with work on major projects, but he added that the sector had been dogged by constant cost overruns and delays.

“Given that construction activity is forecast to be flat in 2018, if government cannot improve delivery of its infrastructure plans, construction output is likely to decline next year.”

GB figures

Figures from the ONS showed that construction output for Great Britain contracted by 0.8% over the previous quarter in August 2017.

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Output in Great Britain grew month-on-month in August

This decline in output was said to be a result of decreases in both repair and maintenance, which fell 0.6%, and all new work, which fell 0.9%.

Construction output grew 0.6% month-on-month in August 2017, predominantly driven by a 1.7% rise in all new work.

The month-on-month rise in all new work was said to have stemmed from growth in private housing, which grew 2.3%, and infrastructure, which increased by 3.6%.

Mark Robinson, CEO of public sector-owned built environment specialist Scape Group, said it was comforting to see construction figures beat expectations.

“It is particularly promising to see infrastructure work on the up, rising almost 5% on the year and 4% on the month.”

He said that infrastructure investment was the primary tool in the Chancellor of the Exchequer’s toolbox for supporting the sector in the medium to long term, and he added that the government had to give the green light to more road and rail projects in the Autumn Budget.

“This is no time for modest gestures,” he said. “The government must also promote cross-party support for long-term infrastructure projects, including Heathrow expansion and a ‘Crossrail for the North’ that will support the whole of the UK.”

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