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Having recovered from the slowdown of 2005, construction order books and tender enquiry growth accelerated over the past quarter - except the residential sector, says Experian Business Strategies

According to Experian Business Strategies' survey of contractors, construction activity across all UK regions and sectors has been accelerating for the past three months. In January the index rose two points from December to 58, a level not seen since September last year. Contractors continued to report healthier order books and a higher number of tender enquiries than usual, although they were slightly less optimistic about orders than at the same time last year before the construction slowdown really took hold. In terms of employment, the outlook improved somewhat. More firms expect their employment levels to increase over the next three months.

Looking at the sectoral indicators (see graph below), residential continues to be the weakest sector overall. At 51, the residential activity index suggests activity is creeping upwards, compared with moderate expansion in the non-residential sector and robust activity in civil engineering. January's results were also pessimistic in terms of residential employment. It is the only sector unlikely to see any growth in employment, at least over the next three months. However, forward-looking indicators suggest there is hope as confidence in the housing market strengthens. Residential order books and tender enquires indices both stood firmly in the increasing zone (above 50), suggesting contractors are optimistic.

Once again civil engineering was the strongest overall sector, but the strength of orders and tenders in the non-residential sector may give the sector the edge in the future. Civils' activity index stood at 75, compared with non-residential's at 56. Civil engineers were also most optimistic about short-term employment prospects.

Short-term activity outlook

According to Experian Business Strategies’ Leading Construction Activity Indicator (above), the rate of expansion in construction activity is set to slow over the next three months. In January the indicator peaked at 58, a level unlikely to be maintained over the short term. In February the indicator is predicted to fall to 57, remain steady in March and to fall again in April.

However, fundamentally the indicator will remain firmly above 50, suggesting activity will increase continually over the period, only at a slower rate. The current strength of order levels and tender enquiries is instrumental to this projection and reflects respondents’ optimism about the future.

Material costs

In January, more than 49% of respondents in the residential and non-residential sectors reported material costs increases in excess of 5%. For the majority of these, 30%, increases were greater than 7.6%. Although this represents a sizeable proportion, the cost burden for nearly half of all respondents is less substantial, with 49% reporting more moderate increases of between 2.6% and 5%.

Material cost inflation is more stable in the civil engineering sector. As in the residential and non-residential sectors, cost increases are moderate for the majority civil engineering firms with 56% of respondents reporting increases of between 2.6% and 5%.

However, for 44% price increases in the region of 5.1% to 7.5% are common.

Regional perspective

Contractors’ responses for January suggest activity increased in all but two regions. Composite indices, measuring activity, orders and tender enquiries, measured 50, or above, everywhere apart from in the North-west and Yorkshire and the Humber. Although the situation has marginally improved from last month, the indicator continues to suggest slower construction activity in these regions. After dipping below 50 for the first time since

October 2000, Yorkshire and the Humber’s composite index dropped a further two points in January, suggesting that the rate at which activity is declining had accelerated. The North-west composite index did not change from December, standing at 49 for the second month in a row. Elsewhere prospects are significantly better. Once again Wales recorded the strongest index at 72 points, although this was four points down on last month. The largest rise occurred in Northern Ireland (up six points to 66).

The North-east, South-east and West Midlands were the only other regions to record a rise in their indices. The North-east’s index climbed four points to 59. Increases in the West Midlands and South-east were more subdued, up three and two points respectively.

This an extract from the monthly Focus survey of construction activity undertaken by Experian’s Business Strategies division on behalf of the European Commission as part of its suite of harmonised EU business surveys. The full survey results and further information on Experian Business Strategies’ forecasts and services can be obtained by calling 0870-196 8263 or logging on to www.constructionfutures.co.uk

The survey is conducted monthly among 800 firms throughout the UK and the analysis is broken down by size of firm, sector of the industry and region. The results are weighted to reflect the size of respondents. As well as the results published in this extract, all of the monthly topics are available by sector, region and size of firm. In addition, quarterly questions seek information on materials costs, labour costs and work in hand.