Increased consumer spending bodes well for construction

Whilst the official statistics have recorded a decline in construction output during the first four months of 2016 (see article below), the wider UK economic data point to a more positive industry performance ahead. The latest ONS data confirms that the UK economy grew by 0.4% during the first quarter of 2016 to stand 2% up on a year earlier. Historically growth of 2% or more in the UK economy has been a pre-requisite for rising construction output. 

Firm growth in services has more than offset the recent weakening in manufacturing and construction, with distribution, hotels & restaurants being a particularly strong growth area. This bodes well for construction activity during the second half of 2016.

Demand in the economy is being boosted by higher consumer spending; household consumption rose 0.7% in the first quarter and was 2.6% up on a year ago. Improved consumer confidence appears to be boosting discretionary spending whether it is on eating out or in the shops; the volume of retail sales in May 2016 is estimated to have increased by 6.0% compared with May 2015. 

Household spending is expected to remain firm. The number of people in employment has climbed to 31.59 million, while the unemployment rate has fallen to 5.0%, the lowest since August to October 2005. Average weekly earnings in April were growing at 2.2% per annum, while inflation remains very weak at 0.3%.

Stronger household spending should underpin the flow of construction projects over the coming months in consumer related areas such as housing and hotel & leisure. 

Fixed investment has also been rising, but the pace of growth has faltered since the middle of last year. Total fixed investment in the first quarter of this year was 1.1% up on a year ago, but this compares with 6.2% annual growth seen in the first quarter of 2015.  The slowing in capital expenditure growth in part reflects a weaker outlook for the world economy, but political uncertainty over EU referendum has also increasingly been a dampening influence. The outcome of Thursday’s vote could potentially see private investors pressing ahead planned investments, reviving growth in industrial and commercial development activity.