Brickonomics

Figuring out trends in housing, construction and property


Cracks are already appearing in the Government strategy on the building materials trade gap

Brian Green

The construction industry imports about 10% of its output value in building materials and seems to have done all my adult life at least.

Admittedly the figures are a bit ropey, but the pattern looks pretty clear from the top graph.

Building materials imports and exportsThis is important, because the Government’s rather suspect industrial strategy (pdf) for construction has as one of its big targets a 50% cut in the building materials trade gap by 2025.

Looking at the current data I reckon that means, according to my quick calculations anyway, exports would have to expand at about 4% a year just to hit that target if imports remain where they are now.

If imports continue to grow with construction output – as they have over the past four decades – and construction grows at, say, a modest 2% a year, then exports will have to grow at about 6% a year.

Building materials imports and exports deflatedThat’s a big ask. The second graph, which I have adjusted to take some account of inflation, illustrates just how poorly exports have performed over the past two decades.

I raise this issue of imports and exports because that big ask is likely in the short term to get a whole lot bigger.

The rapid increase in house building has generated a shock in the demand for bricks and blocks.

A number of factors were at play here in addition to simply the extra bricks and blocks needed to build more homes:

  • Production had been lowered and stock levels reduced leading up to the surge in demand as house building activity had been waning in mid to late 2012
  • There was an unscheduled shutdown at one of the aerated block plants taking out supply
  • Builders needed to expand their production pipelines, this added to demand
  • There was a bit of panic buying

Housing starts completions outputIn fact if we look at the recorded level of housing activity the upturn doesn’t so far seem that spectacular. And sales of both bricks and blocks didn’t spike that crazily, even though firms were recording best-ever quarters in the early part of 2013. Had they been prepared they would probably have been able to pumped up their stocks in the winter to have accommodated most of the upswing.

production of aerated blocks

What threw me looking through the data was how since August deliveries of aerated concrete blocks actually fell, while brick deliveries increased. This paradox was explained to me thus.

The sharp rise in demand up to August was met in part from stocks which eventually ran down. This meant firms having to limit supplies on a priority basis as they turned up production and rebuilt stocks. The net result was a fall from the stock supported level of deliveries, despite a rise in production.

production of facing bricks

But what is clear, builders looked to imports to make up for shortfalls. The graph shows how imports of bricks and blocks jumped in 2013. Most of that jump was down to a surge in the second half of the year. In the final quarter imports were more than double the level in the same period a year earlier.

Concerns over materials supply, especially the supply of bricks and blocks, have not eased. Indeed, the latest Home Builders Federation survey on production constraints shows concerns over materials availability accelerating at the end of last year.

Deliveries bricks and blocksLooking to the future, the hard question to answer now is whether the reliance on imports will become normalised. Price and choice will play their parts here, but if imports become a more permanent feature of the brick and block industry it may well lower the incentive of manufacturers to invest in the UK.

And don’t forget decisions to invest here are not just based on demand. For instance, for manufactures of these products energy costs and certainty of supply are determining factors. There are big questions over the UK’s energy policy.

Imports bricks and blocksFor me, however, the more telling curve is the one that shows exports of concrete blocks falling below those of imports.

In microcosm we see here the scale of the challenge set by the construction industrial strategy in trying to cut the building materials trade gap by 50%. It may prove tough over the next few years just to hold the trade gap steady.

 

 

Postscript

What would’ve been handy is if the Government had not allowed the industry to shrink to the level it did.

Imagine if as a nation five years ago we had directly funded 200,000 homes. We could flog them off now and not just pocket the uplift in value, but also we’d have saved a fortune on benefits, gained on taxes and kept an industry and its skills readied for when it would be needed. Like now.

On my crude count back in 2008 that would have earned or saved us as a nation a total of more than £10 billion. And guess what, we’d have 200,000 more homes.

Am I bitter? Perhaps we all should be.

How less work led to more growth – lessons in statistics from the latest construction data

Brian Green

Here’s a prime example of why it’s important to use a range of measures and timeframes rather than one single stat when using statistics as a tool to examine or describe whatever you’re interested in.

The headline figures from the latest construction statistics say that construction grew in the final quarter of 2013 by 0.2%. This compares with the earlier estimated 0.3% fall released when the first estimate of GDP was published late last month.

Looking simply at this changed figure the immediate interpretation is “Brilliant the industry is doing better than we thought!!!”

Well actually, here’s the thing. It isn’t.

It was less work than expected that made construction grow more than expected in the final quarter.

Trust me this isn’t some conjuring trick and it’s not too hard to follow.

Using the data from the GDP figures last month I produced a graph (the top one of the two below, the second uses the latest construction output data from the ONS) making an estimate for the missing December figure for construction output. I estimated £9,577 million (using data from Table 2a: Chained volume measure of construction output in Great Britain: 2010 prices, seasonally adjusted).

Construction outputWith the graph to illustrate my case, I wrote a blog saying construction was still growing despite the estimated fall in the final quarter. My first point was that the figures would be revised and I provided a soft hint that it would likely be up – although making plain that it could have been down.

I’m not a clairvoyant. Revisions happen all the time and you can get a hint of how things might change. Though sometimes (well quite often really) you’ll be wrong.

What’s fascinating (and it amused me) is that the newly published table 2a shows a figure of £9,576 million for December. If I’d put a spread bet on my initial guesstimate of £9,577 million what would I be raking in now?

The point is that with the same figure for December we have ended up with two different stories: one of decline taking the data at the time of the GDP estimate; one of growth from the latest construction output data.

The irony here, as I said earlier, is that the upward revision for 2013 Q4 from a fall to growth comes as a result of less work having been done than we thought (about £550 million) in earlier months.

So we get what may seem paradoxical, less actual work than previously estimated leading to the headline number of stronger growth in the final quarter.

This is why we need to look beyond the simple headline measure and take a longer view of the statistics when interpreting the numbers.

Look at the two graphs. How much real difference is there? Little. But the narratives that might be created from making poor selections from the data that feed these two graphs could be radically different – one saying growth the other saying decline.

This would not be the fault of the statistics. It would simply be poor narration.

Don’t panic over construction output drop. The industry remains on a growth path

Brian Green

Don’t panic. Construction is still growing. The first estimate of gross domestic product may show that quarter on quarter construction output was down 0.3%. But there’s no reason to suggest underlying growth has stalled.

Getting obsessed with a single quarter’s figures, let alone a single month’s figures in construction is a bit… well… obsessive.

Construction for GDP story

The graph shows clearly how erratic monthly data are and how, even averaged over three months, the figures still bounce quite a bit. Looking at this chart you’d have to be a real pessimist to see construction activity flagging.

Here are four points that I think should be noted in relation to the latest construction estimates in the GDP data.

The first point is that the data are very preliminary and will be revised. They could well go up and you may well find that the fourth quarter was flat rather than down. Then again they may be revised down.

The second point is that the construction industry is very hard to measure. Things like seasonal adjustment and inflation are extremely hard to get right so they can cause distortions from reality. Furthermore there are uneven lags in the data caused by the difficulty of collecting consistent responses from businesses, so the monthly data are in effect in blurred vision.

The third point to note is that construction is a pretty lumpy business and big swings are not unusual.

But there is, at the moment, a fourth point I think is very important to bear in mind – restocking. That is to say the amount of output needed to lift the amount of work in progress, within the production pipeline, to a level that better matches the expected level of future demand.

This is going to have quite a big impact on private housing at the moment given the sharp rise in expected sales. The impact will be even greater if the stock of homes for sale had fallen sharply just as demand from Help to Buy kicked in. Not only will firms have had to be doing more work to finish more homes to sell, but in the early stages they will have been doing more work to increasing the amount of infrastructure and part-built homes in the pipeline.

Sure enough the figures provide some support for this notion. You see an impressive near-10% rise in private housing output between the first and second quarter of last year, before a more subdued rise in the third quarter, with activity flattening out a bit by August.

This surge of activity is consistent with house builders suddenly opening more sites and starting many more homes to meet the pace of future demand.

There was a similar jump pattern in the commercial sector between the second and third quarter when output jumped by almost 7%, with growth calming a bit in the autumn.

Now restocking the production pipeline will not be the only thing at work here. It may not be that much of a factor. But it could be. A step change in production levels can cause a big surge in work on the ground, so it should not be surprising that we saw such a surge and then a subsequent easing in growth.

Taking all the above points in to account it seems pretty clear to me that we have to look beyond monthly and even quarterly figures to appreciate the underlying growth pattern of construction at the moment.

For what it’s worth, my take is that the industry hasn’t stalled it probably just expended a lot of effort earlier on in the year building a platform for growth in the future, so bulking up the second and third quarter output. I suspect there is reasonable underlying growth and most other indicators would seem to support this view.

Just how sustainable and strong this underlying growth will prove in the longer term is another question. There are plenty of problems ahead yet and awkward issues that I suspect will remain unresolved until after the General Election.

But I’d be surprised if for the next year or so the industry, as measured by ONS, didn’t show pretty reasonable growth, even if it the rate of growth does bounce about a bit.

 

More optimism, some caution, as all main industry forecasts see construction bounce back

Brian Green

Two more construction forecasts came out over the past week that added to the consensus that suggests construction is set for strong growth up to the General Election.

Indeed, with the exception of the Hewes forecast, the view is that strong growth will continue well after 2015.

Forecast 2014 2The Hewes forecast tends to embrace more of the downside risks and in that respect charts a more cautious approach to potential growth.

On that basis it seems reasonable to assume that it would take a nasty and a much unexpected economic storm to deny construction solid growth for most of the next couple of years.

The question then is: What happens after the General Election?

The view of three of the four forecasts covered in the graph, Construction Products Association, Experian and Leading Edge, is that growth will continue above trend through to 2016.

These three forecasts suggest that the end of the recessionary period is with us and, all other things being equal, the industry should by 2016 be on a much better footing with a few years of growth behind it.

It’s also worth noting that the Experian forecast says that the upside and downside risks over the forecast period now look more evenly balanced than at any time over recent years. Many of the bigger downside risks, such as a Eurozone meltdown, have eased.

But why then does the Hewes forecast appear to take a different tack after the General Election?

The first thing to point out is that these forecasts are based on the convention that there is no significant change in the current policy framework after an election, unless there is very good reason. These forecasters are not in the business of trying to guess which party will win.

Certainly looking at the timing it might be assumed that the Hewes forecast is suggesting a pre-election surge followed by a post-election squeeze. That would misrepresent the message.

Yes, it would be naïve to suggest politicians in power didn’t seek to pump up economic activity before an election. And there are plenty of reasons to suspect this is occurring now and helping to improve the fortunes of construction.

However, what the Hewes forecast seems to be suggesting is that there will be a pause for breath that checks the growth path after the General Election. There is no suggestion of construction once again falling back into a full-blown  recession.

What lies behind this suggestion is the need to address some of the more awkward imbalances currently in the economy. Added to this there are some negative structural problems which Hewes believes may inhibit growth.

The underlying economy is far from normal. The path of the Bank of England base rate is historically unprecedented. We have quantitative easing. We’ve Funding for Lending and Help to Buy. Compensation for Payment Protection Insurance misselling has recently pumped billions of pounds into consumer spending.

As the effects of these fade or the stimulus is unwound there is likely to be a drag on demand for construction.

Meanwhile the underlying economy is delivering a shabby performance on wage growth, exports and business investment. And, of relevance to the construction sector, we are seeing a revolution in retail that is seeing the virtual shop undermining the prominence of the physical shop.

These impacts on the economy, and more specifically construction, lead Hewes to forecast, among other things, a flattening out of private house building and commercial building in 2015.

This Hewes argues would lead to a check in the overall growth rate. But the impact rests very much on timing.

For my money there may be a bit more time for the industry to build up a head of steam before the full effects resulting from resolving these issues bears down on construction growth.

But, the key point that is emphasised by the Hewes forecasts is that troublesome issues remain and there is significant uncertainty over when and how they will actually be addressed.

That said, it will be a reassurance to the much-bruised construction industry to have a set of forecasts all revised upward.

Forecasters see strong growth for construction – but, then again, the General Election is coming…

Brian Green

The latest industry forecast will put a smile on the face of the UK construction folk. The recovery is now expected to move faster having arrived earlier than forecasters expected just three months ago.

The Construction Products Association now expects to see growth in 2013 of 1% instead of the slight decline it forecast three months ago. It has also raised its forecast for 2014 to 3.4% against 2.7%. Its 2015 forecast was raised from 4.6% to very strong 5.2%. Its projections for 2016 and 2017 however were trimmed.

The twice-yearly Leading Edge forecast was also revised up. It is, as the graph shows, even more bullish short term.

Forecast 2014 1For what it’s worth, the forecasts suggest that construction will be back on its long-term (since 1955) trend line by 2015, although changes to data collection and industry definitions does make that observation a bit iffy.

So, inevitably there will be a sense that things are getting back to normal.

Certainly, compared with earlier forecasts, there seems less of a sense of downside risk and uncertainty. And the growth figures are significantly large to suggest that a dip back into recession over the next five years seems very unlikely. Indeed this year is expected to be the last to see a decline in any of the major sectors.

All great news then?

Yes, but you’d be a nutter not to recognise that there will be risks and not to spot the political convenience of a rising economy in a run up to a General Election.

So what are we seeing here?

Part of the uplift in the numbers, at least near-term, will be down to revisions made by the Office for National Statistics a couple of months ago. These revisions added about £1.5 billion to the official estimate of construction output.

But strip that out, the main reason for the greater optimism within the forecasts is the recent stream of more upbeat data. The economy and construction are on a much steeper upward path, finally, after bumbling along in the valley of recession. The RICS construction survey and the Markit/CIPS PMI data have gone pretty much stratospheric and it’s hard to find a downbeat construction trade survey.

On the ground the uplift in house building has received much attention, but what is most noteworthy in these forecasts is the revised outlook for commercial building.

Housing and commercial building dominate the new-build sector. So having both of them growing strongly does provide a big impetus to growth overall.

But importantly the recovery is spreading out from its heavy reliance on housing in London and the South and, to a lesser extent in the public’s eye, infrastructure.

There now seems to be a more widespread improvement. This was a point picked up in the previous two brickonomics blogs. It also helps explain why trade surveys appear so bullish. A large majority of firms now appear to be enjoying some growth – how much and how well spread is harder to tell.

This suggests improving economy generally, along with fewer worries over economics risks, is helping to lift the boats of more construction businesses around the nation as investors take the plunge and commission construction.

Certainly the regional prognostications produced by Leading Edge suggest much more widespread growth than in the previous forecast.

This is very encouraging.

But when we look at what’s driving the economy things are a little less comforting. Since the summer of 2012 consumer credit has been rising. Over the year to November 2013 the stock rose 5%.

It’s true that mortgage debt is not growing as fast, currently at about 0.6% a year. But interpretation here is important given the asymmetric distribution, where long-term mortgage holders have low debt and are enjoying low interest rates. There are about 1% fewer mortgages than a year ago.

So consumer debt seems to be a factor buoying the economy. Meanwhile, business investment doesn’t look anywhere near as rosy, having a negative contribution to growth along with exports in 2013 Q3. Government expenditure, meanwhile, has been contributing to GDP growth.

This is a long step from the nicely-balanced economy of the Chancellor’s hopes and dreams. And with George Osborne still highlighting the need for austerity in the future, have we just witnessed an easing of austerity before it is re-emphasised after the General Election?

Meanwhile, the economy is still receiving the economic equivalent of the stimulants and analgesics you’d expect of a patient in intensive care – Help to Buy and Funding for Lending, combined with quantitative easing and a Bank rate that hasn’t been this low for this long for as long as there has been a Bank of England.

This all needs to come out of the system, we would expect.

The real uncertainty I see within these forecasts is how well embedded and sustainable will the recovery be in early 2015. Because there seem to be some very awkward and uncomfortable policy manoeuvres to come.

But looking on the bright side, whether these forecasts are a bit on the optimistic side or whether they actually understate the momentum building behind the construction sector, they certainly provide plenty of scope for the industry to invest in itself and boost recruitment and development of talent.

The construction industry is £1.5 billion bigger and growing faster than we thought last month

Brian Green

The annual turnover of the construction industry is about £1.5 billion bigger than we thought it was last month and it is growing much faster.

That really is the big story from the latest estimate of construction output made by the Office for National Statistics.

This is pretty big news. It means that the estimate for GDP will be boosted by about 0.1% as a result of the revisions to the construction output data. So we should expect to see the consensus forecast for GDP growth in 2013 rise from 1.4% to 1.5%, all other things being equal.

OutputMeanwhile these revisions leave industry forecasters scratching their heads wondering what it all means for the direction of construction growth.

The chart shows output on a three-month (blue) and 12-month (red) moving average basis. There is not much impact on the annual figure, but as you can see from comparing with the previous months three-monthly data (orange) the recent growth is far stronger.

The reasons for the upward revisions, which added about £2 billion to the volume measure of work done by construction firms over the past seven quarters, are broadly down to late data, revised seasonal adjustments and, it seems, some changes to how inflation is measured.

Within the data filed late category the worst laggards seem to be civils firms. So this sector has been boosted quite a bit, although there appears to have been some reclassification from repair and maintenance to new work. There was also a fairly large upward revision to the current price data for housing repair and maintenance, private industrial and private non-residential repair and maintenance work.

To add to this uplift there were adjustments to the seasonal adjustments and there also seems to have been some changes to the indices used to adjust for inflation. The upshot is ONS now think there was more work done than they thought last month.

Looking through these revisions and at what the data might all mean, the signs seem very positive.

There’s no surprise that private housing is driving growth, with about 8.5% more work done in the first 10 months of this year than last year. But, in part due to the revisions, private commercial also now seems to be cantering along nicely and looks on track for a rise of about 4%. That represents a major turnaround since the last set of industry forecasts, when there was fear of a further fall this year.

The message ONS is sending to construction firms with this latest estimate of output is clearly seasonal:

“Have a Merry Christmas and look forward to a Happy New Year”.

Sluggish rise in construction job creation, but the signs of future labour shortages increase

Brian Green

For all the shouts and screams about a surge in construction activity there are few signs in the latest employment figures of a surge in employment.

The figures show industry employment in the third quarter up 0.7% on a year ago. But the number directly employed was actually down on a year ago. The number of self-employed however has jumped 4%.

Jobs 13 11 13 2

The rise in the number of self-employed may be a better sign of the growing demand for workers, as firms, particularly house builders, look to rapidly ramp up the numbers of bodies on site.

The more interesting figure was the drop in those unemployed. The number of former construction workers unemployed is down to its lowest level since the summer of 2008 at 120,000.

The figures suggest 21,000 construction workers left the dole queue between June and September and there are 47,000 fewer than a year ago.

This is fantastic news for those who have been suffering without work. But looked at from an industry point of view it highlights the scarcity of resources at the disposal of firms as they gear up for sustained growth.

What the graph showing the change in the “army” of construction workers, those employed and unemployed, illustrates is that the pool of available skills is still in decline. And cumulatively it is down more than 400,000 since 2008.

As it expands the industry will find ways to get around the shortage of skills and materials. Importing labour will almost certainly be part of the approach.

But if the Government wanted to do something smart and long-term – indeed if it just wanted to make inward migration less attractive to align with its immigration policies – it would invest heavily in targeted skills training and mentoring to give struggling youngsters, particularly from tough backgrounds, a chance to build a career.

Having failed to invest in construction during the downturn to preserve jobs and provide valuable infrastructure at a net discount to the nation, this is a second chance for the political establishment to redeem itself.

Why brick data are still useful in tracking house building – if less so than in the past

Brian Green

The latest Building materials and components statistics were released by the business department BIS today. So I thought it worth having a wee peek at how facing brick deliveries have been going, given the general fuss about house building.

I tweeted a few graphs earlier to show how brick deliveries had changed, which as I suggested provides a hint at changes in house-building activity.

Brick deliveries and completions Brick deliveries Brick production and deliveries Brick production and deliveries quarterly Brick stocksBut it seems wise to add a few words of caution, since, as with all data, the brick figures should be subjected to questioning. The top graph – not tweeted earlier – shows how brick deliveries (annually) have fluctuated since the 1960s and how closely they have tracked private housing completions.

The booms in the early 1970s and late 1980s are clear. But it is interesting to note the fall in facing brick deliveries since 2003, despite the rise in homes built. This is most likely linked to the changing planning that promoted denser building on brown land and a very different mix of housing forms, notably more flats.

Urban flatted schemes are often constructed more like commercial buildings than traditional housing. Facing bricks don’t necessarily feature as the cladding, or may be used but blended with other cladding.

This weakening of the relationship between brick use and homes built in the noughties may well be why the brick figures seem to get less attention these days. If you went back 20 years you’d find those following the fortunes of house builders pretty studiously tracking the brick data. And I am sure many still do.

There is a host of factors that influence the relationship, such as where types homes are built, how large they are and whether they are flats of houses, how easy it is to get hold of bricks, how much stock is held by intermediaries, how easy it is to use an alternative, the availability and price of imports.

But for all these problems the brick figures remain an interesting piece of the data jigsaw and provide at least a hint in the short term of the change in the level of house building.

So here are a few highlights.

The figures show deliveries up 21% in the third quarter of this year compared with the same period a year ago. This suggests quite a rise in production. It is the highest three monthly figure since June 2008.

However, the industry would need to increase the current amount of deliveries by a quarter to get back to the level seen in the third quarter of 2007.

Meanwhile, production would have to increase almost 50% on its third quarter 2013 rate to get back to the corresponding level seen in 2007.

And as we can see from the lower graph the stock level is falling fast. There is, according to the figures about 13 weeks of stock at the level of deliveries over the past year.

If we look at the stock level in relation to third quarter rate of deliveries this drops to about 10 weeks.

Anyway, here are a few graphs looking at the data in various ways.

Sustained output growth is just the start of a long recovery for construction

Brian Green

The latest Markit/CIPS survey of construction activity came out yesterday grabbing big headlines and very possibly spectacularly misinforming the general public.

The most common interpretation seems to be: “Construction grows at fastest rate for six years.” This is not surprising because it was what the Markit release actually said.

Growth 1I’m not saying this is bonkers, but it would surprise quite a few people if the official construction output figures record the fastest growth in six years in either the third or the fourth quarter of this year.

The third quarter preliminary estimate of GDP put construction growth at 2.5%. This is pretty strong for a quarter. But growth in the second quarter of 2010 hit 5.9% after first quarter growth of 3.1%.

I’m not seeking to be pedantic, here. But there’s a problem. The strident headlines suggest to the general public and policy makers that things in construction are pretty tickety-boo. They’re not.

Industrial performance should be more seen more as a marathon than a sprint. So we should be more nuanced about pace and acceleration and what they mean.

So let’s have a go. Let’s look a bit closer at the data and the context.

Firstly the Markit/CIPS index may be at a six year high. This doesn’t mean that growth is too. The index is not a measure of aggregate volume in the industry or change in aggregate volume for that matter. So as an index it shouldn’t be seen as a measure of actual growth.

It’s just possible that a lot of firms are feeling at least a little better. This would boost the index more than a few people feeling very much better, even though the latter could provide more growth. There are of course a few other issues with surveys such as this but I’ll not repeat them yet again.

By way of comparison it’s worth looking at the scores for construction provided by the Bank of England Agents. These seem to provide a more sober view of the state of the sector.

Growth 2

The figures are created from intelligence gathered by the Bank’s agents. Again they’re not exactly a measure of growth rates, rather a view on the health of the sector. In my view these data seem to map slightly closer to the official output figures.

That said the Bank of England data chimes with Market/CIPS and indeed with the RICS construction survey and RIBA’s Future Trends survey that came out last month. Things are improving.

Importantly this improvement is being felt on the ground. The latest NSCC survey of the construction specialists shows enquiries, orders and recruitment all increasingly positive (see left).

Furthermore we will see next week the Construction Trade Survey – compiled by the Construction Products Association and covering surveys of members from range of industry sectors. This will show the breadth of improvement within the industry. And the media is awash with other trade surveys and general economy indicators that look favourable.

Fantastic. But before getting carried away let’s explore what lies beneath, what lies ahead and what challenges the industry faces on the way.

As mentioned earlier construction growth – at least as far as the official figures are concerned – was very rapid growth in 2010. It didn’t survive much beyond the General Election.

Starting with the challenges facing the industry, probably of most note is that recovery will be a prolonged process for an industry ravaged for six years or more. There’s a need to invest to rebuild the industry. That means spending on training, investment in new equipment and IT.

Just looking at employment, large numbers have left the industry. Those remaining are on average older, so –despite a higher retirement age – the industry will be shedding skills fast. This means a lengthy period of recruitment and training and probably investment to improve productivity.

Profits too will need to be rebuilt. Many firms have been working at an operating loss, eating into their reserves and holding off investment. This cannot be sustained. Construction prices will rise, at least in the short term.

Meanwhile main contractors have to work through a raft of contracts bid at ludicrously low prices against a headwind of rising subcontracting, labour and materials prices. This could well send some under, further damaging the fabric of the industry.

Then we have the aspirations of the Government-Industry strategy which is calling for improvements and cost savings. That means yet more investment.

That all amounts to a big challenge.

Growth 3Then let’s look at what’s actually driving the recovery. Well, in part you’d expect a recovery at some stage and as the third of the graphs shows it’s been a long time coming. And actually, on the current data, it doesn’t look that fantastic so far, if you scale for the numbers of adults overall and in work.

The turning point seems to have come about a year ago. How much the Funding for Lending scheme, launched in July 2012, helped is hard to know, but it seems to have supported the growth after the economy appeared to be heading for yet another recessionary dip.

On top of that we’ve had Help to Buy, which has underpinned recovery in house building and fuelled excitement in the housing market more generally. This almost inevitably will have fed through into greater consumer confidence, at least among homeowners.

Global instability has made London a city of choice for a huge amount of international wealth, while the easing of fears of financial mayhem in the Eurozone has made investors more willing to invest in development. This has all supported construction, especially in London.

But of huge importance all the above has been set against a monetary policy backdrop looser than any seen since before William and Mary where on throne.

Meanwhile on the fiscal side the Government’s austerity, while I would argue grotesque on the capital spending side, has perhaps not been as harsh as some might have thought. Furthermore employment levels have held up rather better than most expected as workers took cuts to pay rather than cuts to numbers. This has, in part, provided less pressure than might have been expected on the Treasury coffers.

And let’s not forget George Osborne is a very political Chancellor. Rebalancing the economy – the little we have seen – seems to have pushed to the back seat as he seeks to conjure growth. He knows he needs the economy to be jollying along as the nation walks towards the poll booths.

So what lies ahead? Well there is, as always, in economics a few twists. Many of the policies currently in place and much of the benefits the economy is receiving are simply the result of the awfulness of the pickle we’re in. As we un-pickle ourselves these will, in time, vanish.

Help to Buy may be a quick victim if the housing market starts to run riot, or more of a riot as some would see it. Interest rates will most likely rise earlier the stronger the recovery. Stability abroad may make London a shade less attractive.

Basically the faster we grow the quicker the shutters come down on the sweet shop.

And then there is the General Election a year and a half away. What does this mean for policy post 2015?

So while it is easy to get excited about the recovery in construction, and it is welcome, the reality is that growth is just the start of what is likely to prove a long hard struggle along a bumpy old road for many firms and the industry as a whole.

Strengthening data push construction forecasters towards greater optimism

Brian Green

Construction industry forecasters have been busily upgrading their forecasts in the light of a turnaround in industry fortunes since Spring.

Despite all raising their expectations for the future path of construction, at first glance the forecasts from Construction Products Association, Experian and Hewes appear to be telling very different stories. That certainly seems to be the take-away message from the graph.

(A note of the graph: Construction Products Association forecast numbers were based to 2010 prices. To make them compatible with Experian and Hewes they have been converted to 2005 prices)

In some ways they are telling different tales, but in reality there’s more similarity than meets the eye.

One important point to note is that the Experian forecast was cast before recent revisions to the official data. The chances are that it would have been more bullish had it been produced a few days later. That is one of the problems of forecasting against data that is regularly and sometimes quite heavily revised.

But importantly, all three forecasts see, quite predictably, stronger growth in the private housing sector in the years to 2015. But they also see a smaller fall in the public sector spend.

The net effect of this is that the turning point where the industry starts to grow again has been in effect brought forward. We are enjoying the turn now rather than later in the year or early next year as had been expected in previous forecasts.

The initial source of the improvement in the housing sector seems to trace back to Funding for Lending introduced last year, which provided funds for mortgage lending. More recently this has been bolstered by the Help-to-Buy scheme, which provided a mechanism for delivering that extra money into an expanded market that includes those with more limited access to deposits.

The reason for a less severe crash in public sector construction is less obvious. There are areas where things may be performing better than expected, such as spending by universities. But in general it does rather fit with the view that capital spending has been increasingly subject to a lighter form of austerity than might have been expected earlier, as the Government has tweaked the tiller in the face of heavy lobbying.

Looking to what might be regarded as the market driven improvements, rather than Government sponsored, these are a bit patchier. Yes there is a degree of confidence that the economy is finally on the mend and this should translate into improved demand for construction.

Certainly the Construction Products Association sees a brighter outlook for the commercial sector, especially offices.

And it sees this supporting strong growth across the industry through to 2017. Hewes and Experian do not present such long-range forecasts. The implication in the Construction Products Association forecast is that output will return to its previous peak level in 2017.

This implication needs to be taken with some caution, which is recognised by economics director Noble Francis. The official data is in reality a splice of two different surveys and the parts that made up the series before 2010 are not fully replicated in the new series.

That aside, what underlies the bullishness in the forecast is the belief that firms are now in a stronger position to invest and that this investment will come from a low base, so one would expect a degree of catch-up.

Furthermore helped in part by the support to the housing sector, the view is that consumer spending will strengthen.

All of this comes against a background of reduced anxiety over the economy generally. Fears over the Eurozone have been less prevalent of late. This will have helped confidence, which is a key factor in turning investor intentions into actual investments.

For the first time in a long while the Eurozone is not noted as a potential downside risk within the Experian forecast. This doesn’t mean it has disappeared, but it is less worrisome.

It is the forecasters approach to risk and the general confidence in the underlying economic prospects that most separates the views of the forecasters.

The Construction Products Association and Experian tend to take a positive view, suspecting that the balance of risks favour relatively strong growth. Hewes tends to forecast on the downside relative to the other two forecasts. While Hewes is hopeful of an economic recovery strong enough to bolster growth in the construction sector, the view expressed in the forecast remains cautious.

It is certainly true that there is a huge question mark over what happens to the private housing sector when and if Help to Buy runs down. Furthermore the scheme may be reined in if house prices race.

Meanwhile, interest rates remain at their historical low point. They will have to rise at some point. And there is a General Election closing on the horizon, so how much of what we are enjoying now is a pre-election surge?

And the threat of further global economic tremors has not disappeared.

So there are plenty of potential downsides. However, with the balance sheets of firms much improved, with firms seemingly more confident to invest and consumers more willing to spend there are upsides too. Generally speaking the signs are that the risks are more evenly balanced.

This explains some of the optimism in the Construction Products Association and Experian forecasts. However, because significant uncertainty and big risks do remain, it would seem that Hewes is eager to see more proof before committing to a view that strong growth is on the cards.

Perhaps the message to take is that there is plenty of room for greater hope, but there remains plenty of reasons to temper optimism with caution.

 
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