Latest Construction Output Data Raises Questions Over Industry Strength

ONS figures published today show that construction output increased 0.5% month-on-month in April.

Set against this, construction output was 3.3% lower than in April 2017, and on a rolling three-month basis contracted by 3.4%, the largest fall since August 2012 – driven by falls in both repair and

maintenance and new work, which fell 3.0% and 3.7% respectively.

Meanwhile, new orders in Q1 fell 4.6% quarter-on-quarter and 6.6% in annual terms.

Underlying weakness
Rebecca Larkin, Senior Economist at the Construction Products Association, commented:
“The 0.5% rise in April reflects an element of catch-up after the combination of Carillion’s liquidation and the bad weather in February and March.

“This seems like a false positive, however, as output remained weak compared to April last year, with the 3.3% fall equivalent to a £430 million reduction in construction work. Only the private housing and industrial sectors recorded growth, the former driven by the traditional spring selling season and the latter due to shorter lead times in factories and warehouses construction.

“The new orders data confirmed an underlying weakness at the start of the year unlikely to be due to the weather. Private housing, industrial and public non-housing new orders increased during Q1, but large falls in the infrastructure and commercial sectors, which account for almost one-third of total construction, are set to act as a drag on growth.”

Sector Certainty

Brian Berry, Chief Executive of the Federation of Master Builders (FMB)

Brian Berry, Chief Executive of the FMB, added: “The Beast from the East has certainly played its part as it forced many construction sites to close in March. Indeed, builders were reporting that it was too cold to lay bricks.”

Berry continued: “Alongside the cold snap, the drop in construction output can also be attributed to rising costs for construction firms large and small. While wages are continuing to rise because of the acute skills crisis in our sector, firms are also feeling the pinch thanks to increased material prices.

“The depreciation of sterling following the EU referendum has meant bricks and insulation in particular have become more expensive. We expect material prices to continue to squeeze the construction industry with recent research by the FMB showing that 84 per cent of builders believe that they will continue to rise in the next six months.”

“In the medium to longer term, with nine months until Brexit-Day, the future is uncertain for the UK construction sector. The Government is still to confirm what the post-Brexit immigration system will look like. The construction sector is largely reliant on accessing EU workers with more than 8 per cent of construction workers coming from the EU. It is therefore imperative that the sector knows how, and to what extent, it can recruit these workers post-Brexit.”

A sea of warning lights

Blane Perrotton, managing director of the national property consultancy and surveyors Naismiths.

Blane Perrotton, managing director of the national property consultancy and surveyors Naismiths, commented: “The construction industry dashboard is now a sea of warning lights.

“For months, housebuilding had served as a ‘get out of jail’ card – mitigating or even nullifying the declines in other construction sectors. No longer.

“With the output from all sectors bar one now firmly in contraction territory, the fall in new orders suggests the slide is here to stay.

“Last month’s GDP report awarded construction the wooden spoon for being the worst performing sector of the economy, and today’s disappointing numbers from the ONS drive home the seriousness of the industry’s weakening confidence and softening investor demand.

“One of the few bright spots is the availability and cheapness of finance. With an interest rate rise not expected until August at the very earliest, lenders continue to offer good terms to developers.

“Yet demand is patchy at best. While there is genuine momentum in the North West and West Midlands, in London and much of the South East, developers are battening down the hatches – concentrating on completing existing projects rather than commissioning new ones.

“With workers’ rising wages slicing into contractors’ already tight margins, there is likely to be more pain to come for contractors who are forced to bid low for work. While deals continue to be done, a sizeable chunk of the projects that could be done are being deferred until after the Brexit fog passes.”

Troubled Waters

Michael Thirkettle, Chief Executive of construction consulting and design agency McBains.

Michael Thirkettle, Chief Executive of construction consulting and design agency McBains, said:

“Today’s statistics prove the construction sector is still in troubled waters with continuing uncertainties, borne from Brexit, and the poor value of sterling impacting on the cost of imported materials, meaning many UK companies are delaying investment decisions.

“The real test, however, will be in the months to come, given the uncertainty over issues like Brexit that have impacted on UK companies’ commitment to new projects over the last two years.”

 

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