Building intelligence Q4 2005: A bump in the road

Construction output fell in 2005, the first fall in the industry since 1994, bringing to an end the longest continuous period of growth since the 1960s. However, at just 0.8% the decline was marginal and total output remained relatively high at £79.6bn (2000 prices). New work and repair and maintenance (R&M) output both suffered in 2005, down by 1.2% and 0.2% respectively. However, before we take an in-depth look at 2005’s winners and losers, Experian Business Strategies look to the future and find it is really quite bright.

In its latest construction output forecast, Experian Business Strategies suggests 2005’s decline was a temporary blip and is forecasting an immediate return to growth in 2006. In 2006 total output is forecast to rise by 1.5% and by 2008 this is expected to have increased to 3.7%. If this accelerating growth profile is realised, by 2008 construction output could surpass the £86bn mark, in real terms, for the first time since records began.

Going forward, new work activity is likely to be the main driver of overall growth and is forecast to rise by 11% between 2005 and 2008. Activity on the R&M side is expected to be a little more subdued and output is likely to increase by a lesser 5% over the forecast period. Overall, a respectable 8% increase in total construction output is forecast to 2008.

Having been stuck in the doldrums for the past three years, infrastructure is expected to see the biggest turn around over the forecast period. The long awaited recovery is forecast for 2006 and the sector’s prospects improve further in the second half of the forecast period. High profile rail projects in London, such as the Docklands Light Railway extension and the East London Line, and Waverley Rail Project in Edinburgh, will provide a welcome boost to the sector, as will several large-scale road schemes.

Elsewhere, the commercial and public housing sectors are forecast to grow strongly over the forecast period, with increased in the region of 16% and 20% forecast respectively to 2008. Private housing is forecast to give a relatively subdued performance compared to its strength in the early part of the decade, but should nevertheless record year-on-year growth over the forecast period.

Public non-residential is likely to be the least buoyant sector going forward. While output is expected to grow in 2008, this will only manage to return output to current levels after a forecast decline of 3% in 2006.

Output 

Total construction output in Great Britain was £20bn (2000 prices) in the fourth quarter of 2005 (4Q05), equal to that in both 3Q05 and 4Q04.

New work output has been rising since 1Q05, increasing by 1% in 4Q05 from 3Q05 and by 3% from 4Q04. Industrial and commercial sectors performed strongly in 4Q05, while infrastructure and private housing fared less well.

R&M output failed to recover in 4Q05, having been in decline since 1Q05. At £9.1bn (2000 prices) R&M output declined by 1% from 3Q05 and by 2% from 4Q04. The contraction in public housing R&M was particularly severe.

Over 2005 as a whole total work output stood at £79.6bn (2000 prices), falling by 1% from 2004’s record £80.2bn. Activity was equally subdued in both new work and R&M. New work output dropped by 1% while R&M output was unchanged from 2004.

Orders 

Total new work orders peaked at £8.2bn (2000 prices) in the final quarter of 2005, their highest quarterly level since the late 1980s. Commercial, industrial and public housing orders rose most robustly, contributing to a 6% increase overall from the third quarter. From the fourth quarter of 2004 orders rose by a substantial 11%.

Over 2005 as a whole orders increased by 6% to £31.4bn (2000 prices). Infrastructure and industrial sectors were key drivers of this rise, increasing by 36% and 23% respectively over the year. Orders rose in almost all sectors, the sole exception being the public non-housing sector whose orders declined by 9% to £4.8bn (2000 prices). Great Britain’s two largest sectors, private housing and commercial, increased moderately in 2005 by 5% and 3% respectively.

Regional orders 

The latest data from the DTI shows that total orders, in current prices, in Great Britain in 4Q05 were up 12.6% from 4Q04 but down 7.5% from 3Q05.

New work orders increased in 11 out of 14 regions in 4Q05 compared to 4Q04. The largest increases occurred in Beds, Essex and Herts, the North West, the South East and London, at 56.7%, 38.9%, 29.9% and 19.6% respectively. Such a sizeable increase in the North West was driven by the infrastructure, public non-residential and private housing sectors, while increases in the South East and London owed more to the strength of the commercial sector. Beds, Essex and Herts robust performance was down to a substantial rise in the industrial sector.

Relatively moderate increases were seen in all other regions, except in Yorkshire and Humber, the South West and Scotland where orders declined.

Top performers aside, three other regions recorded double-digit growth, namely Kent, Surrey and Sussex, and the East and West Midlands.

According to the National House Building Council (NHBC), whose members build around 90% of all homes in the country, there were 4% fewer starts in Great Britain in 4Q05 compared to 4Q04. Housing starts declined in many regions, but fell most acutely in the North East and Wales, down respectively by 42% and 36%. Housing starts were only higher in four regions in 4Q05 than in 4Q04, namely Yorkshire and the Humber, the East of England, the South West and South East. Starts rose robustly in the South East, up by 29% during the quarter. Increases were more subdued in the other three regions.

Regional output

The value of total construction output in 4Q05 was £27.1bn, in current prices, up by 5% from 4Q04 and unchanged from 3Q05. New work output increased in both quarter-on-quarter and year-on-year terms, and rose by 1% and 6% respectively. Repair and maintenance (R&M) output also increased from 4Q04 by 3%. However, R&M output did fall from 3Q05 by a marginal 1%.

New work output increased year-on-year in all regions in 4Q05, except for Yorkshire and Humber. Beds, Essex and Herts again enjoyed the strongest growth in percentage terms, rising by 21.8% to an historically high £763m, in current prices. Infrastructure and industrial sectors were both key to this performance. In value terms, London and ROSE dominate, with output of around £2.1bn, in current prices, in both regions in 4Q05, up 3.4% and 9.3% respectively from 4Q04. Kent, Surrey and Sussex, the East Midlands and the North East all featured at the higher end of the growth scale, having increased by 18.7%, 15.3% and 12% respectively over the quarter. Rises of less than 10% were seen in the remaining regions. Yorkshire and Humber bucked the rising trend and fell 4.2% to £1.3bn, in current prices.

Three regions saw a fall in their R&M output in 4Q05, while in the majority R&M output rose. Increases were however muted compared to those seen on the new work side. The strongest expansion again occurred in Beds, Essex and Herts, with R&M output up 9.8% from 4Q04. London and Scotland enjoyed similarly buoyant rises of 9.2% and 9.3%. As with new work output ROSE and London dominate in value terms, although in the R&M sector ROSE has the edge. Respectively R&M output in ROSE and London amounted to £1.9bn and £1.7bn (both in current prices).

Output in the South West suffered the greatest fall, down 4.6% to £1bn, in current prices. Less severe declines were seen in Wales and the North East.