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13 October 2017

Construction dependent on infrastructure and house building

Most construction firms are going to notice the impact of subdued economic growth, rising inflation and falling real wages over the next two years, with both infrastructure and house building key to sustaining growth.  

In addition, negotiating unprecedented uncertainties as the UK leaves the EU is expected to result in little growth, with output expected to rise 0.7 percent in 2017 and remain flat in 2018.

The latest forecasts from the Construction Products Association (CPA) come at a time where any growth at all will be reliant on government’s delivery of infrastructure projects. This is likely to have a profound effect on construction output, which if not realised would lead to an industry-wide decline of over 1 percent in 2018.

Infrastructure activity is forecast to grow 25.4 percent by 2019 and will be due to major projects in rail and water and sewerage, such as HS2 and the £4.2 billion Thames Tideway Tunnel.

House building will continue to be a primary driver of growth, with private housing starts rising by 5 percent in 2017 and 2 percent in 2018.

In 2017 Q2, the Government’s Help to Buy equity loan accounted for 40 percent of new homes and has been a significant policy for supporting building activity. The additional £10 billion that the Government announced for the scheme in October will continue to sustain house building, despite the slowdown in the general housing market.

The sharpest decline will be in the commercial sector, and particularly felt in the offices sub-sector as EU Referendum-induced wariness among investors has led to a sharp fall in contract awards.

Office construction is expected to decline 5 percent in 2017, worsening to a 15 percent decline in 2018. This is likely to accelerate if it proves to be the case that the UK will not be part of the Single Market and financial services firms choose to transfer operations out the UK into other EU member states.

Noble Francis, economics director at the CPA 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 are ending and are not being replaced.

“This is 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 has slowed considerably.

“The falls in commercial construction may be offset by growth in house building and infrastructure. In house building, the 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, house building is only expected to grow by 2.2 percent in both 2018 and 2019.

“Infrastructure is expected to be major driver of construction activity in the next few years with work on major projects, but the sector has been dogged by constant cost overruns and delays. Given that construction activity is forecast to be flat in 2018, if the Government cannot improve delivery of its infrastructure plans, construction output is likely to decline next year.”

 

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