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.”