Fixing the foundations

While the release of the summer Budget did not include much for the construction industry the follow-up document, Fixing the foundations, contained more substance. It set out the policy regime that the industry will operate in over the next five years and was the first admission from the government that the economy has a productivity problem. Clearly, construction has an important role to play in the drive for increased productivity. The two main avenues for doing so are, according to this document, building more houses and boosting infrastructure. Not earth shattering news for anyone involved in the construction industry and it has a familiar ring to it. Activity in private housing has driven growth within the industry over recent years but the rate of housebuilding is still not anywhere near enough to keep pace with population growth. Infrastructure activity, on the other hand, has been low over recent years. Despite a number of announcements, the evidence of a pick-up in activity has been sparse. Encouragingly, there are some signs this is changing.

While construction output figures show the industry declined between April and May there was actually an increase in infrastructure output. The latest figures from the Office for National Statistics show infrastructure output increased by 16.2% in May 2015 compared with May 2014 and in terms of absolute levels of activity it was the highest since summer 2011. Barbour ABI data for infrastructure contracts awarded is also encouraging, with contract values 43.5% higher in June than in 2014.

So is this a sign of a resurgence of public funding of infrastructure? Well, the government roads strategy has resulted in a number of road improvement contracts awarded over recent months, which is no doubt driving the improving output figures. However, the shift towards renewable energy sources is probably more of the reason for recent growth. While this is to be welcomed, it is still the case that more contracts to improve the creaking transport infrastructure are needed. While there are some signs this is changing there is some way to go before it results in a “firmer foundation” for the UK economy.

Michael Dall is an economist at Barbour ABI