Healthcare spending in need of resuscitation

A fall in healthcare spending that is helping hold back the construction industry looks set to continue. The Construction Products Association (CPA) cited weak health spending as among the reasons for a second consecutive quarterly fall in output.

Spending in other areas such as private housing remains strong, but Office of National Statistics data shows public non-housing output, which includes the health sector, shrank 4.1% in Q3 2017 as the industry registered an overall 0.9% decrease in output that followed a 0.5% fall in Q2. Senior CPA economist Rebecca Larkin, said that the “areas of weakness” in the commercial sector were “echoed in the public non-housing sector, which is suffering from lower volumes of work on schools and a dearth of new large hospitals projects.”

Glenigan’s data illustrates this with contracts awarded on just two major hospital schemes with a value of £100 million or more in the past 12 months.

The £350 million critical care centre at Llanfrechfa Grange Hospital in Wales started on site in July 2017, while a contract was awarded in October 2017 for a £200 million expansion of Great Ormond Street Hospital in London – although this scheme is not expected to start on site until late 2019. A new elective care hospital at Ascot in Berkshire is due to start on site in March 2018, but even then Glenigan only values the construction element at £90 million.

These major projects have helped sustain the position of the Department of Health (DoH) amongst the industry’s top five clients, but this looks set to change.

In the 12 months to Q3 2017, the total value of contracts awarded by the DoH fell to £1,090.7 million compared to the preceding 12 months (2016: £1,133.2 million) according to Glenigan’s data and the DoH was ranked fourth.

However, these major projects are set to fall out of the DoH’s total and there is no sign of replacements, while spending at a lower level is also contracting.

Underlying project starts, which exclude projects valued at £100 million or less, fell by 69% in three months to October 2017, which was the steepest fall of any of the 11 sectors tracked by Glenigan. This shows that the lack of spending in the health sector is not restricted to major projects.

With the underlying value of health work in the planning pipeline shrinking 12% in the most recent quarter, the prospects for this sector are not good.

“Over the medium term, NHS capital budgets will remain under pressure and will be squeezed by rising costs elsewhere in the service,” said Glenigan economics director Allan Wilen. He added: “Although the government has pledged an extra £8 billion for the NHS budget, we expect this to be required for the cost of day-to-day services, and improvements such as seven-day GP opening hours and rises in the costs of social care rather than significant capital investment. Against this tough financial background we anticipate only a minor recovery in project starts during 2018.”

Glenigan forecasts that underlying project starts in the health sector will fall by 3% this year, then edge into the black with a rise of 3% in 2018.