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21st May 2015
Author: Tom Crane – Glenigan Economist (@TC_Glenigan)
The Office for National Statistics estimates that output in the construction industry fell by 2.2% between Q3 and Q4 2014 and by a further 1.1% in the first quarter of this year. According to ONS data, the strength of these falls has been sufficient to pull activity down to a level lower than a year ago.
The Glenigan Index, which covers the value of projects starting on site during the preceding three months, similarly fell in the final quarter of last year and was roughly flat on a year earlier in Q1, after accounting for cost inflation.
By contrast, the Q1 2015 Construction Trade Survey, compiled by the Construction Products Association, found that construction activity rose for the eighth consecutive quarter, with large contractors, SMEs, civil engineers and product manufacturers all recording growth. The Markit/CIPS PMI survey also signalled strong growth over the last six months, although with some slowing in the rate of expansion since the turn of the year.
So what’s really going on?
Comparing figures to the previous quarter, the biggest causes of the fall are new work - public housing and non-housing - and commercial. One other important driver of the year on year fall is repair and maintenance work in the private housing sector, which is one of the most difficult areas of construction to gauge.
Almost half of the work in this sector is produced by micro firms employing four people or fewer, compared to around 15% for new work, and without large sample sizes it is hard to pick up trends. The small nature of many R&M projects means that many fall beneath the £250,000 value threshold that Glenigan uses to construct our market data.
With this in mind, we have compared the ONS new work series with the Glenigan Index to judge whether estimates seem too low. Indexed to 2011, the series tracks fairly closely with the value of projects starting in the same quarter and during the previous six months. Glenigan data is based on the value of actual projects on site rather than survey data and therefore give a more precise picture of activity than a binary balance of better/worse captured by the trade surveys.
A sustained divergence has emerged since the beginning of 2013, possibly reflecting a relative lack of major developments. The latest two quarters of falling output, which have raised eyebrows, have coincided with a downturn in projects starting on site in Q1 2015 and the two preceding three-month periods.
Compared to a year ago, starts in current price terms in the nine months to March were up by 4.4%. Taking the ONS new work deflator of 5.7%, this would predict a real fall of 1.3% in new work output over the last year, which is in fact sharper than the 0.1% dip in the official release.
This appears to explain the falls in the ONS series, however given the continued strength in sentiment, planning approvals and economic backdrop, it would seem to be a pause rather than the start of a downturn. The run-up to the general election could be a possible, but non-definite cause.
Reality probably lies somewhere in between the buoyant trade surveys and the picture painted by Glenigan and ONS figures. The weakness in the commercial construction data remains a puzzle, although is perhaps due to the relative lack of major office scheme in London at peak phases of construction.
Overall the industry’s growth rate does appear to be slowing and has most likely turned negative in the short term. However, with the majority of the industry remaining positive and reporting continued growth, conditions are ultimately still strong and the Glenigan outlook of expansion for both this year and the next remains unchanged.
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