Flat construction output, but industry prospects brightening

Construction output appears to have bottomed out following the sharp declines seen in 2012. The volume of construction output during the three months to May was unchanged on the preceding three months, according to the latest figures from ONS. However, this was against a weather disrupted December to February and output during the three months to May was still almost 5% down on the same period a year ago. 

The lacklustre performance is due to a number of factors. Infrastructure and social new housing were the only two sectors to record a rise in output against both the preceding three months and on the corresponding period of 2012. Elsewhere public funding constraints have made themselves felt with an 18% decline in public non-residential output against March to May 2012. Private sector activity has also been subdued: Industrial and commercial output were both down on a year ago, with commercial output volumes falling 10%. Private new housing activity paused for breath; sector output for the three months to May was almost 2% down on a year ago, despite output in May being 2.7% up on a year ago. Similarly repair & maintenance output was also down on a year ago with the sharpest decline being in private housing RM&I activity.

Construction Output

Whilst the latest output figures serve as another reminder of the difficult market conditions still faced by the industry, there are signs for optimism. Current levels of work on site are in large part dictated by projects started over the last year, especially in the new build sectors where major projects will feed into output for several years. Accordingly the current drop in public non-housing output reflects in part the sharp cuts in public sector funding from 2010/11 to 2012/13. Whilst government funding remains tight, the current declines in funding are more modest. Indeed additional resources are being directed at particular areas such as education. 

The drop in private sector investment is disappointing. The subdued performance in the private new housing sector may reflect the weather induced drop in project starts earlier in the year. The recent recovery Glenigan has recorded in private housing project starts points to a renewed strengthening in output during the second half of the year. Similarly the drop in industrial and commercial activity appears to reflect the recent slowing in project starts after the strong growth seen in 2012. In particular the drop in commercial sector is likely to be attributable to decline in supermarket related retail work and hotel & leisure projects.  However, sector prospects are brighter with a broad strengthening in industrial and commercial project starts forecast for the second half of this year and 2014.

Encouragingly the latest research by Begbies Traynor found that the number of construction firms at a critical level of financial distress has halved over the last year, despite the subdued levels of construction activity. A strengthening in market conditions will bring fresh challenges for construction firms from firmer costs and increased calls on cash flow. However the sharp decline in critical distressed firms suggests that industry is better placed to meet these demands.