Regional Construction Forecast Data 2010: The Big Picture
Construction should begin its long and slow recovery in 2010, but even by 2014 output is still likely to be well below 2008’s level.
Employment in the industry is likely to continue to fall until early 2011and then begin to pick up to 2014.The Global economy has just passed through its worst slump since the Second World War, with GDP falling across Organisation for Economic Cooperation and Development (OECD) countries by an estimated 4.1% in 2009, and the volume of manufacturing world trade dropping by a stunning 16%.
For the UK the contraction in GDP for 2009 is estimated at 4.8%. Contagion spread quickly from the financial markets to impact on every corner of the economy. It is one of the ironies of this recession that although it started in the financial sector, others, including manufacturing and construction, have been more severely affected, caught in a pincer movement of falling demand and difficulties in financing new projects. In the construction industry, it has been the private sectors that have borne the brunt of the recession. The private housing sector has suffered its second consecutive double digit decline in output in 2009, taking the level of activity down to below that seen in the depths of the 1990s recession in real terms. Industrial construction has all but collapsed in the short term, with the most recent surveys showing a very low level of floorspace under construction. Commercial construction held up well in 2008 but has fallen sharply in 2009 as work-in-progress has been completed and little in the way of new projects have come on site.
In contrast, the public sectors have largely done better. Although public housing has struggled with supply issues as the number of sites on which to provide social housing through section 106 agreements shrunk alarmingly, the public non-housing sector saw good growth driven by the Building Schools for the Future programme and work on the Olympic Park. The general feeling is that the worst of the recession is technically now over. GDP was originally reported as declining by 0.4% in the third quarter of 2009 by the Office for National Statistics, but this has now been revised upwards to -0.2%, more in line with analysts’ expectations. It is likely that the final quarter of the year will have been at worst flat, bringing to an end the longest recession in the UK since the 1930s. A modestly positive outturn is projected for 2010 and then for GDP growth to strengthen to around 2% per annum to 2014. However, this rate of growth will be well below the long-term trend of 2.5% as lending regimes remain more stringent than they were in the decade to 2007, there is still a still high level of household indebtedness, and it is highly likely that there will be a drop in government investment to address the ballooning public debt issue. The worst should also be over for construction as a whole although the impact of job losses will continue to reverberate throughout the industry for some time yet. A further but marginal decline is projected for output in 2010 but over the whole of the 2010 to 2014 period UK construction output is expected to average 1.7% growth each year.
However, the balance between public and private work will change. As economic conditions improve, stabilisation and then recovery are expected for the private housing, industrial and commercial sectors, although the timing of the upturn will vary across markets. In contrast, the public sectors are facing expenditure cuts as whichever political party comes to power in the General Election of 2010 they will need to start constraining growth in public debt, which is forecast to reach 80% of GDP by 2014.
At this time it is difficult to pinpoint exactly which major programmes of work will be affected most by public expenditure cuts, although the suspicion is that all will be impacted to some extent. One programme of work that will be exempted from the issue is the Olympic build programme, with its no-fail deadline. However, activity on the Olympic Park will begin to wind down in 2011 and the completion of the project will leave a big hole in activity that will only be replaced in small part by projects relating to the 2014 Commonwealth Games in Glasgow.
In a recession, falls in employment tend to lag falls in output as employers try to hold on to experienced and skilled staff for as long as is practicable. However, this means that a recovery in output does not immediately mean a rise in employment and employment in the industry is unlikely to bottom out until 2011. The situation has been further complicated by anecdotal evidence of a significant level of ‘underemployment’ in the industry such as those on short time working or who have taken unpaid sabbaticals. This is likely to mean that the lag between rising output and employment could be longer than normal, as excess capacity among those still in work is taken up before new employees are taken on.
Having said this, the fall in employment in the industry has been severe. From its peak in 2007, employment is projected to contract by over 400,000 by 2011, a 15% decline. Between 2010 and 2014 employment is forecast to grow by 93,000, a 4% increase, but this will still leave employment in the industry over 250,000 below its 2007 peak.
For employment in the UK construction industry to match the level of output growth forecast between 2010 and 2014, on average, nearly 48,000 new entrants will be needed each year. This average recruitment requirement takes account of the natural flow of workers into and out of the industry such as those retiring, or changing career.
Comparing the Sectors
Infrastructure
For the fourth consecutive forecast, infrastructure is the sector predicted to be the strongest over the next five-year forecast period, with an annual average growth rate of 8.5% between 2010 and 2014. It seems to be the case that as one project completes another of equal or bigger size comes along to replace it. A good example of this is A1 improvement work where the section between Darrington and Dishforth has been completed and work is now ongoing from Dishforth to Barton. There is little doubt that the main driver of the sector over the next few years will be big transport projects such as Thameslink, M25 widening, Manchester Metrolink extension, and the Forth Replacement Crossing, which is due to start in 2011 to be ready to take over from the current bridge in 2016. There are also various overground and underground station redevelopments already on site and the biggest of them all, Crossrail, should start in earnest in mid-2010.
In the energy sector, starts are likely to be made on the first of the new generation of nuclear power stations around 2013 or 2014, with the first projects likely either at Hinckley Point or Sizewell. Total build costs for a nuclear power station are estimated at £4bn each, with about 50% of this being construction-related.
However, some projects have been delayed or fallen by the wayside in the course of 2009. The Victoria Underground station upgrade has been delayed due to lack of funds, DP World is still considering the future of the London Gateway port project, and it now looks highly unlikely that any Severn Barrage power project will get underway in the foreseeable future.
Public and private housing
In theory a much higher level of funding in the 2008-2011 Affordable Housing Programme (AHP) should have delivered increasing output in the public housing sector. However, social housing providers have been hit by stricter lending conditions, both through their ability to access funds directly from private lenders, and through income generation from sales of units under low cost home ownership schemes (LCHO). Delivery through section 106 agreements also became problematical as the number of private developments where social units could be sited dried up.
As a result output in the sector fell in 2008 and 2009. Funding allocations under the current AHP have gathered pace in 2009 and the next two years should be much better for the sector. Post-2011 the picture changes again as at best the next AHP is likely to have only the same level of funding as the present one and thus if social housing providers are going to increase the supply of new units they will need to access higher levels of private finance. After two very bad years, which have pushed private housing output to below the level seen in the early 1990s, the recovery in house building activity is projected to begin in 2010. Rising levels of both mortgage approvals and loans in recent months, while not returning these indicators to what would be considered ‘normal’ levels, has at least pushed them well above their respective nadirs at the beginning of 2009. There is concern, however, that rising house prices in recent months will prove to be a bit of a false dawn, driven more by supply constraints than any significant increase in demand. Lending conditions still remain tight, although they have eased a little, with some return of the 90% mortgage. Kickstart funding, designed to give impetus to stalled mixed tenure projects should benefit both the public and private sectors in the short term. As of the end of November 2009, nearly £360m had been allocated under the programme across 136 projects delivering nearly 10,300 new homes. As the private housing sector recovers from a very low level, its annual average growth rate over the 2010 to 2014 period is projected to be 8%, higher than the sector’s long-term average rate of 5%.
Public non-housing
Two major programmes of work are driving this sector in the short term, the Olympic Park and Building Schools for the Future. However, the former is due to start winding down from around mid-2011 and the latter could be subject to expenditure cuts from around the same time. This means that after three years of good growth, output is likely to start declining in the sector from 2011 onwards and the contraction could be steep and long term.
Industrial
Industrial construction all but collapsed in 2009, hit by the double whammy of falling global and domestic demand for manufactured products and the natural end to what had been an exceptionally strong boom in the supply of distribution and logistics facilities. Industrial construction output will have fallen to a lower level in 2009 than that seen in the depths of the 1980s recession, which hit manufacturing very hard. It is unlikely that activity can drop much lower and with a recovery in global demand already underway, the trend for the sector should turn upwards from 2011. However the strength of growth will be predicated to some extent on whether projects such as the London Gateway port go ahead, as this scheme is expected to generate longterm demand for around £1bn of distribution and logistics facilities in its hinterland.
Commercial
The commercial construction sector is projected to be one of the worst performing over the 2010 to 2014 period as a whole, due to further falls in output in the first two years. After holding up well in 2008 due to the amount of work in progress, output is likely to have fallen by around a quarter in 2009 as projects completed and few new ones have come on site. With demand for office, retail and leisure facilities likely to remain muted for some time to come, and significant levels of availability, it will be a while before these sectors see the start of the next development cycle. Of the big football stadia projects that were in the pipeline most have been abandoned or are still mired in financial problems. Only that for Tottenham Hotspur FC seems likely to go ahead at present, and as the planning application for this project has only just been submitted, start on site will not happen any time soon.
Repair and maintenance (R&M)
Housing R&M activity is expected to increase only modestly between 2010 and 2014. In the early part of the forecast period activity is likely to decline in both the public and private sectors. The Decent Homes for All programme is winding down and while the Welsh and Scottish Housing Quality Standard Schemes are ongoing, they are not big enough to materially affect the UK figures in the light of a much more constrained environment for local authority finances. On the private side, disposable incomes are coming under pressure, particularly with the likelihood of further tax increases over and above the return of VAT to 17.5% from the start of 2010 and National Insurance increases from April 2011 recently announced. This and continuing employment uncertainties are likely to make home owners wary of big-ticket purchases until there is evidence of a sustained improvement in economic conditions.
Public non-housing R&M is likely to be under the same financial pressures as public housing R&M and thus is likely to decline slowly over the forecast period. On the private non-housing side, expenditure on routine and cyclical maintenance should increase once the corporate sector sees a sustained return to rising asset values and increasing profitability. It is interesting to note that there is wide divergence in annual average output growth rates across regions and devolved nations for the 2010 to 2014 period, from a high of 3.8% in the East of England to a low of just 0.1% in the North West. In large part the size of the range is due to when different regions and devolved nations went into recession and thus when they are likely to emerge from it.
The UK as a whole saw a modest reduction in output in 2008 (-1%), a very sharp contraction in 2009 (-13%), and is projected to experience another modest fall in 2010 (-1%). All regions and devolved nations have experienced fairly substantial falls in output in 2009, however Yorkshire and Humber, the East Midlands, the East of England, Wales, and Northern Ireland all had much bigger falls in output than the UK as a whole in 2008. With the exception of Yorkshire and Humber, each of these areas are projected to have positive growth rates in 2010. The strongest growth is forecast for the infrastructure sector over the 2010 to 2014 period, however the main beneficiaries of this are Greater London and the East of England, with a raft of major transport projects on site or in the pipeline, such as Thameslink, Underground station redevelopment, London Gateway - although the future of this project has become more uncertain in recent weeks - and the biggest of them all, Crossrail. All other regions and devolved nations, except Northern Ireland, are also projected to have decent rates of growth in infrastructure activity.
For the past two years, Northern Ireland has led the growth rankings, with the strongest forecast increases over both the 2008 to 2012 and the 2009 to 2013 periods.. However, construction in the province is more heavily reliant on public funding than most other regions and devolved nations and there is increasing uncertainty whether the money will be available to deliver on the 2012 to 2018 part of the Northern Ireland Investment Strategy. Thus the forecast for the province’s infrastructure sector in particular has become much weaker than in previous years, and Northern Ireland’s overall annual rate of construction growth has fallen to 1.1% for the 2010 to 2014 period, placing it 8th out of 12 in the rankings
The East of England is forecast to be the most buoyant region, with an annual average growth rate of 3.8% between 2010 and 2014. The region is expected to emerge from the recession in 2010, a year earlier than some and all the major construction sectors are expected to grow to a greater or lesser extent. The East of England is the only region or devolved nation where this is predicted to be the case. Even the public non-residential sector is expected to grow, albeit modestly, largely because of a negative – the fact that it has not benefited strongly from Building schools for the Future (BSF) work in the recent past so will lose out less in any cuts programme.
In contrast, regions such as the North West and North East, which have benefited strongly from the early waves of the BSF programme, are likely to see quite sharp declines in public non-residential output if prospective expenditure cuts hit the education building sector hard. In Wales, housing R&M activity is projected to hold up much better than across the English regions as work under the National Housing Quality Standard gathers pace. Thus the annual average growth rate for housing R&M in Wales is forecast to be 3.8% between 2010 and 2014, much higher than the 0.4% predicted for the UK as a whole. With good growth also forecast for the private housing and infrastructure sectors, the principality’s annual average growth rate stands at 2.5%, placing it 4th in the rankings after the East of England, Scotland and the East Midlands.
Scotland is towards the top end of the rankings in terms of output growth performance, with a projected annual average increase of 2.8%, well above the UK average of 1.7%. Like Wales, it also benefits from a public housing R&M expenditure programme along the lines of the Decent Homes for All in England, which gives Scotland a projected annual average rate of increase for housing R&M of 3.2%. This, combined with a good recovery in the private housing sector should provide the main impetus for increasing construction activity over the forecast period.
What do these output projections mean for employment across the regions and devolved nations? Following severe job losses, employment in the UK as a whole is expected to rise by around 90,000 between 2010 and 2014, an increase of 4%. However, this growth is likely to be quite unevenly spread, with the East of England, Scotland and Wales seeing increases of around 9%, while the South East experiences no growth. The rate of change in employment is not just predicated on overall construction output growth, but also in which sectors this growth occurs. The R&M sectors are much more labour intensive than the new work ones, thus a 1% growth in R&M output will generate more employment than the equivalent level of output growth in new work. Even within new work there are significant differences in labour input between sectors, for example infrastructure projects tend to be less labour intensive than housing ones.
Thus the relatively strong employment growth projected for Scotland and Wales is not just due to good overall construction output increases, but more specifically to both devolved nations’ housing R&M programmes. Not surprisingly, the annual recruitment requirement (ARR) tends primarily to be a function of the size of the construction market in a particular region and devolved nation. Thus big markets, such as the East of England tend to have high ARRs and small ones, such as Northern Ireland, tend to have low ARRs. However, this is not always the case as other factors do come into play. While the East of England is only the 4th largest construction market in the UK, it has the largest ARR at 7,350. The reason for this is a combination of the highest level of demand growth, allied to the fact that the region has the largest R&M market proportionally in the country and thus its level of employment in relation to output is higher than any other region or devolved nation.
In contrast, Greater London’s ARR, at 3,300, is relatively low given that it is the largest construction market in the UK. However, the capital tends to act as a magnet for construction workers from other areas of the country and has high net natural inflows with a smaller replacement requirement than most other regions and devolved nations.