Prepare for recovery

Setting aside the success of the Olympics, there were few positive developments in 2012. The construction double dip was far more pronounced than that experienced elsewhere in the economy, in part reflecting the success of the 2009/10 stimulus programme. Sadly, in 2012 the lack of new sources of demand and investment became all too apparent, and delays in launching PF2 and other crucial public sector programmes exacerbated the effects of the double dip.

Construction’s slowdown has occurred across all sectors - including infrastructure which, up until recently, had seen record levels of workload. While an optimist might anticipate that a deep, broadly based slump will eventually be followed by a recovery on most fronts, in reality, some sectors will continue to bump along the bottom for some time to come.
So, what are the prospects for 2013?

While an optimist might anticipate that a deep, broadly based slump will be followed by a recovery on most fronts, in reality, some sectors will be bumping along the bottom for some time

Viewed from the perspective of the first week of the new year, the prognosis is not bright. Data for the pipeline of new orders from the third quarter of 2012 rang alarm bells last month, and the December Construction Purchasing Managers Index issued last week was also weak - reinforcing the view that the trend of declining order books will be sustained into the new year.

Looking further afield, there are signs of optimism, but these are tempered with a sense of realism borne of wider uncertainty and two previous years of poor economic performance. Last week’s poll of economists in the FT demonstrated a broad consensus that the UK will experience either very slow, but sustained growth or little growth at all. Some forecasters suggested that growth would be so slow as to be barely detectable.

Economic recovery is typically defined as sustained above-trend growth, and the consensus is that this will not occur until at least 2014. As a result, the economy is not likely to return to pre-bust levels of output until 2015. Realistic but downbeat forecasts are no cause for celebration, but at least are positive. Subject to continuing risks from the global economy, there is a growing sense that a corner has been turned.

Will the construction industry see any sign of this sea change during 2013? There are already some signs that the housing market may improve during the year. Based on CIPS data, it needs to, as it is the weakest sector by far. The Bank of England’s latest Credit Conditions Survey indicates that the availability of credit for loans secured against property has increased significantly, and that lenders are targeting growth in market share. Volumes of lending are likely to remain at half the level seen in 2007, but increased demand is the only trigger for a growth in housebuilding volumes.

Much of the credit for this turnaround will come from the Funding for Lending scheme, demonstrating that the public sector will continue to have a major role as an enabler of projects, even as its capital budgets fall.

This is the year of the snake and the industry is likely to see plenty of twists and turns over the next 12 months

There is no sign of the breakthrough yet, but 2013 should see the beginnings of a recovery in output towards the end of the year. However, the availability of funding to drive this recovery is particularly sensitive - and continuing delays to investments in energy projects and other major construction projects show how opportunities could easily slip away. This is the Year of the Snake, and the industry is likely to see plenty of twists and turns over the next 12 months.

But is there anything it can do to improve performance and position itself for recovery? I think there are actions it can take, and these mostly relate to longer term changes in the shape of the economy and the industry.

First, the UK Growth Agenda is providing plenty of clues as to where future opportunities will come from - so get aligned. Second, more infrastructure investment is on its way - and the skills, capacity and teams to deliver this effectively need to be in place. Third, cost remains king, and the viability of both projects and the supply chain remain on a knife-edge - increasing margins by removing waste and other unnecessary costs has to be a priority before any recovery is snuffed out by a return to inflation. Finally, the industry will have to focus even more on the client’s business needs, and how performance can be properly incentivised.

2013 will undoubtedly be a tough year, but it will probably see a turning point for the industry. Those businesses that are able to look beyond the “here and now” to prepare for recovery will be well placed to respond to changing client needs.

Simon Rawlinson is head of strategic research at built asset consultants EC Harris