Construction Output hit by Government Cuts

The Government is committed to slicing its overall capital budget by a third during the current spending review period which runs to 2014-15. The sharp 7% fall in construction output volumes during the three months to May is a clear demonstration of the impact that these cuts to Government capital programmes are having upon construction workload. New social housing and public non-residential output were both over 20% down on the same period of 2011. Infrastructure output similarly fell by 21%; although this is likely to reflect a reduction in utilities’ investment programmes as much as drop in road related. 

In contrast private sector activity was little changed on a year ago. Private housing and industrial building output slipped back 2% and 4% respectively while private commercial work was unchanged on a year ago. Whilst confidence is still fragile, it is these sectors that promise to drive industry output during the second half of the year. 

Chart 1: Construction output during three months to May 2012

Glenigan recorded a sharp increase in project starts in these sectors during the first half of 2012. For example private housing starts during the second quarter of 2012 were 40% up on a year ago, while office starts jumped by 82%. This growth should underpin construction output during the final six months of 2012 as work on these projects gathers pace, countering continued weakness in government funded areas. 

Looking further ahead private sector confidence will be critical to the pace of industry recovery over the medium term. Eurozone troubles continue to cast a shadow over both the UK economy and the industry’s prospects. Given the uncertain economic outlook and the fragility private sector recovery a moderation in government cut backs in capital projects would provide valuable support for the industry as well as enhancing the UK competiveness. The Treasury has recently reported that government departments have been more successful than anticipated in cutting back spending, delivering a greater than expected reduction in the deficit. Redirecting these additional savings towards squeezed capital programmes would help rebuild industry confidence and its capacity to respond to future growth.