Construction decline slowing, but industry still in recession

The sale of construction products has continued to decline, according to the latest Ernst and Young/Construction Products Association Activity Barometer. However, the rate of decline is at a slower rate than previously reported indicating a slight improvement from the last quarter, which had returned the lowest figure ever recorded in the barometer.

This quarter saw the barometer reading 12; a figure of 50 represents no change in sales compared to a year earlier with below 50 representing a fall in sales. Therefore the majority of product manufacturers continue to be affected by the falls in construction. Firms in the industrial and commercial sectors are currently experiencing sharp falls in construction and are continuing to suffer more than those in other sectors.

Q3 2009 illustrates that the recession is continuing for product manufacturers, with figures of 6 and 18 for heavy side and light side manufacturers respectively. This is despite a slowing, and in some cases ending, of the destocking that was prevalent in the first half of 2009 and the anticipation that economic activity will return to growth in the third quarter of 2009.

Commenting on the results, Noble Francis, economics director for the Construction Products Association said: “This latest figure of 12 is a considerable improvement when compared to the figure of zero that was reported in the second quarter of 2009 and reflects the recent improvement in the housing sector with house prices, mortgage approvals and housing starts all rising in recent months.

“However, looking forward, manufacturers are still pessimistic but not as pessimistic as they have been over the last three quarters. Figures of 15 and 29 for heavy side and light side manufacturers respectively continue to illustrate that product manufacturers still anticipate further falls in sales in the final quarter of 2009 compared to a year earlier. While economic activity appears to be returning to growth, this does not appear to be the case for construction or product manufacturing where output, order books and employment continue to fall.

“With private construction falling sharply in the offices, retail, warehouses and factories sub-sectors, it is vital that government, whose spending accounts for around 40% of total construction output, does not cut spending sharply in areas of critical importance for long-term recovery in economic activity such as education, housing and road and rail transport infrastructure.”

Dominic McAra, a director in Ernst & Young’s building products team added: “The slight improvement in the results this quarter seem to reflect a tough but at least stable trading environment, allowing companies to plan for the future again, rather than concentrating on the immediate. A number of companies in the sector now appear to have addressed their cost base and are better placed to cope with lower demand than they were 12 months ago. Many of the larger companies have secured medium term funding, with the number of Rights Issues showing that investors still have an appetite for the sector.

“We are still seeing companies approaching the last quarter of 2009 and 2010 with caution, with many still anticipating a tough winter trading period.”