Output might have dropped in January but it turns out construction ended 2015 better than we thought

Michael Dall

The latest figures for construction output, which came out last week, showed that output had declined in January, indicating a slower start to 2016 than expected. The headlines noted that this was an “unexpected” dip, but crucially the final quarter’s figures from last year were revised upwards, meaning a previous decline of 0.3% turned into growth of 0.3% over 2015. When read in this context, the news is actually more encouraging.

Looking over the last year shows that construction output grew by 3.4% in 2015, which was significantly below the 2014 growth rate of 7.5% but still above the long-term growth rate (since 1997) of 1.2%. In many ways 2014 can be seen as the outlier, since growth was so strong and the major reason for this was the rebound in new housing construction. The housebuilding rates had declined dramatically over 2012 to the point that any pick-up in the rate of construction was going to have a marked impact on output levels in construction. This impact has now filtered through the data for construction and growth of 3.5% feels normal for an industry that is growing at a reasonable pace. 

To grow by 7.5% each year would probably mean a significant amount of money being put into major infrastructure projects, a major increase in office construction outside of London, or new entrants into the housebuilding market. Even if one of these things did happen, then the supply of labour and materials would have to increase to meet the improved level of demand.  This still feels like the biggest challenge for construction, matching the level and quality of the labour supply with any increased and diversified demand base. While many will claim Britain needs to be building more, unemployment is at a 10-year low, and getting the amount of labour into the industry to continue the sort of growth experienced in 2014 is going to require changes in supply side policies, which may require more labour to be imported from outside of the UK. While just one option, it is one the government would probably rather leave until after the EU vote in June.

Michael Dall is an economist at Barbour ABI

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