Brickonomics

Figuring out trends in housing, construction and property


Construction output to fall to 1996 levels by 2011, says forecast

Brian Green

Remember the pleasure and pain of Euro ’96, the rise and rise of the Spice Girls, This Life and Chris Evan’s TFI Friday on TV, John Major as Prime Minister and Swampy digging in against the road builders?

Well some of it came flooding back to me when I realised that the latest forecast from Hewes & Associates foresees construction output falling over the next three years to levels last seen in 1996.

That would be a drop of about 20% in volume terms. It would put this recession on a par with the collapse in workload that followed the first oil price shock that saw construction output dive from its zenith in the spring of 1973 to its nadir in autumn 1976.

That was the deepest recession in construction since World War II and it was soon followed by a second recession. This took output from its peak in 1973 to the trough in 1981 down 28%. It was 1987 before volumes of construction recovered to the 1973 level.

As you can see from the graph comparing the forecasts, Hewes is the bleakest of the generally bleak views now emanating from the industry’s prognosticators. I have included this time the forecast kindly sent to me by the consultant Leading Edge, along with Experian, Construction Products Association and Hewes.

But which forecast is the most likely?

Forecasts jan 2009.GIF

Before considering what these forecasts mean, I feel obliged to say what I enjoy saying about forecasts. If the forecaster’s base numbers prove accurate, the forecaster is more likely than not to be right for the wrong reasons.

This is no disrespect to forecasters. But while the core of forecasters work is about projecting forward from things we know now, they also have to take views on the likely outcome of various unknowns, both of the known unknown and the unknown unknown variety. At the moment there are plenty of both.

So when Martin Hewes emailed me a copy of the latest Hewes & Associates forecast, yesterday evening, we chatted briefly about some of the assumptions. He freely admits that he tends to shade his assumptions on the bearish side – his philosophy here being: “prepare for the worst hope for the best”.

That means that on average things shouldn’t get as bad or heaven forbid worse. But what it definitely does not mean is that they won’t.
Assumptions are just that – assumptions about the unknown or indeed unknowable. And in the current climate these assumptions need to be bolder as the fan of possibilities is far wider.

A year or so ago it was as reasonable as not to expect the Government to trim or slow expenditure on capital projects as it was to assume there might be a boost to spending.

The Government was pooh-poohing the notion of a recession, but public debt was starting to look a little scary. Prudence might be whispering in the ear of the Chancellor that a snip to spending might help preserve those (now parked) fiscal rules .

In the end the rather lily-livered (in my view) and tardy position taken was to go for something rather more neutral and Alistair Darling chose to concertina existing budgets towards the present.

The point here is that unpredictable political decision making (inspired or stupid) greatly influences the shape of likely future workload in construction.

But the crystal ball is also clouded by other complexities. One area that is, rather belatedly in my view, creeping into the broader consciousness is that those essentially public projects that rest on private finance of some sort might be less secure than previously thought.

The recent report on private finance projects by Public Private Finance magazine showing that just 34 deals had been signed last year after a decade in which the annual number never fell below 60 does reveal a need for concern. And Graham Watts comments to a committee of MPs that the schools programme is under threat are likely to create a few ripples.

Good.

For many months now Noble Francis at the Construction Products Association and I have talked about looking into the possible fragilities of the private finance element in public works projects in the current market. It is a concern that needs to be examined. I put my hand up on behalf of us both. Our excuse has been finding free time.

But what excuse the Government? Or have they examined the impact of the banking crisis on private-public projects and have not told the wider interested audience?

There is a broad assumption in many quarters of the industry that this stream of work is pretty sound. How sound is it?

So what we can say is that there are some fairly hairy assumptions that need to be made by the forecasters and whether they take an optimistic or pessimistic view will very much lie with their view of risk.

As the rollercoaster ride of the financial world has revealed all too clearly, optimism is a wonderful (if dangerous when unchecked) quality to have on the upswing. It places you ahead of the curve. But there is an increased risk that you will be first and hardest to tumble when the downturn kicks in.

I am sure this notion may echo with those of you who saw the latest part of Evan Davis series on City matters on the BBC last night.
While optimism may be, up to a point, a useful attribute on the way up, it does not necessarily follow that pessimism is equally powerful in a downturn. But it does help to take a very honest account of possible risk.

So, to the question in hard, will construction output fall to levels last seen in 1996 or will we see a bounce back next year?

For my money a bounce back in 2010 looks less and less likely as time and tide drift out. We have had short sharp recessions in construction before, but this certainly doesn’t feel like one.

I suspect it would take a massive injection of public money to shift the downward drift in output and I mean massive.

Equally, at the moment, a fall to 1996 levels seems rather unlikely, but I wouldn’t bet against it unless I was getting very favourable odds.
Then again, as those who know me know, I am not much of a gambler.

My advice: Read the forecasts, assess the assumptions yourself and decide on what level of risk suits your business.

  1. Readers' comments

  2. Brickonomics 3 April, 2009 | Reply

    Annual construction output forecast to fall £23.5 billion over next two years

    The first of the spring forecasts for construction has winged its way into my inbox. It is the Hewes & Associates’ forecast. Hewes expects on the basis of current data that levels of construction output will fall back to those…

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