Economic Overview (Summer 2012)

Construction is set to endure a perfect storm over the next 18 months, hit by deep public sector cuts and a slowdown in private sector activity. In the Association's central forecast, construction output is set to fall 4.5% in 2012 and a further 1.3% in 2013 driven primarily by sharp cuts in funding for public housing, education and health but exacerbated by a slowdown in commercial offices and retail. Growth in construction output is forecast to return in 2014 when a stronger economic recovery, combined with an end to public sector cuts, are expected to drive construction growth. Yet, even by 2016, output in construction is still not anticipated to have returned to pre-recessionary levels.

Yet the picture within construction is highly mixed, both geographically and by sector. Despite construction enduring its most challenging period since the financial crisis began, there are regions and construction sectors that are still enjoying growth. With Europe's largest commercial tower, the Shard, now finished, London and the South East continue to grow, buoyed by high profile projects such as Crossrail, the largest construction project in Europe, in addition to commercial and housing projects. However, construction in other parts of the country continues to struggle, especially within the North East and South West.

Sectors such as private housing, rail and energy are set to enjoy growth throughout the forecast period. Private housing continues to recover from its nadir in 2009, when housing starts fell to their lowest level since 1923. Large house builders are enjoying rising land values, have many years of land with planning permission, have considerable margins and are gradually increasing the number of units. This is likely to be partially offset by reductions in units from SME house builders who are beset by problems of obtaining finance and planning. Rail investment is larger than roads construction for the first time on record and, in 2015, output is expected to be double the figure just five years earlier due to work on Network Rail's programme of works, boosted further by continuing work on Crossrail. Work within the energy sub-sector is expected to rise and, by 2016, is anticipated to be worth three times the value in 2010.

Overall, construction is still set to fall, due to those sectors dominated by public sector funding and those most exposed to both UK and global economic growth. The cuts in public sector funding were stated by government in the Comprehensive Spending Review in October 2010 yet government initially found it difficult to slow public sector construction due to the large number of frameworks signed in the public sector stimulus prior to the change in government. However, the falls in public sector construction finally started feeding through into output last year. Public sector construction is expected to fall 12% in 2012 and a further 7% in 2013. These falls have been exacerbated by a fall in private sector investment. Commercial work has slowed down over the past six months. Offices construction, which was subdued in most of the country but, until recently, buoyant in Central London, has slowed considerably, as it is reliant on international investment, which has fallen due to increasing concerns regarding UK economic growth.

The key risks around the forecast are on the downside, around global and euro zone economic uncertainty, the potential impact of the Green Deal and a potential hiatus in investment in nuclear and renewables.