Not so sunny for the UK Economy

As much of the country basks in a long-overdue heatwave, the outlook for the UK economy is somewhat cooler. Second quarter GDP figures released on Wednesday defied even the gloomiest forecasters by revealing a drop in output of 0.7%, as against the consensus forecast of a 0.2% dip. This represents the third quarterly contraction in a row.

Data for this quarter was always going to be skewed by the effect of the extra bank holiday for the Queen’s Jubilee, but what nobody had been able to factor in was the effect of the extreme weather conditions experienced across country during June and much of July. June 2012 is now officially the wettest June since records began, so the ONS have been quick to point out that this, together with the effect of the Jubilee, casts far greater doubt than normal over these figures, meaning the likelihood of a later revision is highly probable. However, whether that revision will be up or down is impossible to say.

Yet again, blame for the fall was directed firmly at the construction sector, which posted a drop in output of -5.2%, as the effects were felt of infrastructure projects cancelled under the current Government Spending Round and an ongoing lack of demand from the housing market.

Stephen Radcliffe, director of UKCG offered a robust defence on behalf of the industry when interviewed on R4. He was quick to point out that what these figures don’t demonstrate is the size of the UK construction industry -  £120bn. Furthermore, the multiplier effect from construction is immense – every £1 spent on construction creates £2.84 worth of economic stimulus within the wider economy, of which 90p remains within the UK, to create more jobs and further growth. For this reason, Radcliffe urged the government to be bolder in their approach. Whilst welcoming initiatives such as the Construction Pipeline and the access to finance scheme announced last week, he feared they lack the necessary scale to inject meaningful growth into the UK economy. He called for a concerted effort to speed up those infrastructure projects which have already been committed to and for efforts to be made to even out the patchy nature of construction activity across the UK.

Whilst our sector may feel like the whipping boy for the nation’s economic woes, it is important to remember that it is also our sector which can lift the UK back into growth. It is therefore crucial that the government is committed and bold in its approach to secure the recovery we are all anticipating.

Will Dr Beeching be turning in his grave?

Finally the coalition have made a tangible announcement, committing to the much heralded infrastructure investment programme which, we have been told, will galvanise the UK economy and help stimulate a new era of growth (just slightly ironic that the announcement should be made on the day that the IMF downgraded the UK’s growth prospects for 2012 from 0.8% to 0.2% …).

The total investment package of £9.4bn will provide a raft of improvements to the network, including a £500m rail link between Heathrow and the Great Western mainline, full electrification of the East coast mainline and Welsh valley networks plus a series of upgrades to lines and stations in cities including Birmingham, Leeds, Manchester and Liverpool, which, when completed, could allow for an extra 20,100 commuter journeys.

Whilst commentators have been quick to point out that £5.2bn is represented by projects and improvements already planned for and announced, that still leaves £4.2bn of entirely new money.

The Chancellor, George Osborne, said the investment would offer "a significant boost for the major towns and cities of the north" helping to "rebalance the UK economy and enable growth and regeneration throughout the regions".

Undoubtedly an announcement on this scale has to be good for our sector, but with none of the projects likely to commence work before 2014, it’s looking rather more like jam tomorrow …

The other side of the coin …

No-one can deny that conditions in our sector remain the toughest in years and the GDP figures for Q1 2012 have seemingly done little to dispel the gloom. Following on from a contraction of 0.3% in Q4 2011, the first estimate of GDP for the three months to March 2012 showed the economy shrinking by a further 0.2%, thereby technically tipping the UK back into recession. And at the heart of that drop was the construction sector, which posted a drop in total output volume of 4.8% compared with the previous quarter. Within the sector, infrastructure output recorded a decrease of 15.9%.

Ok, so these are sobering figures indeed, but let’s step back for a minute and take a rational look at what we’re seeing. The decline in infrastructure is hardly surprising, given the austerity of the Government cuts. The output figures that have just hit the headlines are simply a reflection of 2011’s order-book - the weakest since 1980, when data was first collected. And the expectation that the private sector would step in to plug the gap has proved, thus far, to be misplaced. Of the £20bn institutional investment that George Osborne heralded in last year’s budget, only £2bn has actually been committed.

So, where do we go from here? The other side of the coin is that recent survey data looks somewhat more promising. The RICS Construction Market Survey showed signs of an upswing for construction, with 21% of respondents expecting an increase in workloads over the next twelve months and 8% reporting actual increases during the first quarter of 2012. April showed similarly encouraging data from the Markit/CIPS Construction Purchasing Managers’ Index (PMI), which recorded stronger than forecast growth with the index coming in at 55.8 for the month. However, May’s figures from the same index reinforced the volatile nature of the sector, as growth momentum slipped away from the highs seen in March and April. Even so, May saw construction activity continuing to enjoy solid expansion.

Data released by the Office for National Statistics at the beginning of June 2012 took a broader view of the state of our sector. It showed growth of 4.6% in new orders, compared to the last quarter of 2011, although, as many commentators were quick to point out, growth was still lower than the same period in 2011. Substantial increases were seen quarter on quarter in private industrial and private commercial new work, which grew by 57.9% and 27.8% respectively.  Unsurprisingly though, the volumes of new orders from the public sector were 41.3% lower than the previous year.

Within the wider economy there are glimmers of hope – short-term, unemployment appears to be falling and inflation recorded an unexpectedly large drop in May, buoyed largely by falls in the oil price. Generally, commodity prices are showing sustained weakness, which, it is to be hoped, will boost chances of recovery.

In short, “weak optimism” probably best summarises the outlook for 2012. The British Chamber of Commerce has reduced its overall growth forecast for the UK economy from 0.6% to 0.1%, although it expects growth to pick up from Q3 2012.

The construction sector, in common with much of the economy, is strongly affected by sentiment and as the eurozone crisis shows little sign of abating, despite the recent outcome of the Greek elections, and recessionary fears abound closer to home, sentiment is not currently working in our favour. As we have outlined, on the one hand there are some positive signs out there, but confidence is weak and the bigger picture is not attractive. David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply summed up the situation:

“Reports of the UK’s return to recession appear to have delivered a blow to general confidence in construction, with this month’s PMI posing some big questions for the sector in the coming months.”