Upwards, not onwards

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Experian Business Strategies' monthly snapshot of the industry shows that activity is still steadily growing - but that doesn't mean sectors are confident about future employment prospects …

Construction activity continued to rise in February, according to Experian Business Strategies latest nationwide survey of contractors. The overall activity index, incorporating responses across all UK regions and all three construction sectors, dipped one point, although at 57 the activity index remained firmly in the increasing zone (above 50). Firms received an above average number of tender enquiries and order books were higher than usual. Employment prospects were, however, less certain. Although a reduction is unlikely over the coming months, any increase is likely to be marginal at best.

Sectoral indicators for February were mixed, making it difficult to identify which sector gave the strongest performance. In terms of activity civils had the edge. Its index stood at 65 in February, higher than residential's and non-residential's index for the third consecutive month. However, having peaked at 75 in January, civils' index endured a sizeable fall, suggesting a substantial slowing in activity growth. Elsewhere, non-residential also suffered a decline, albeit by a lesser two points, whereas residential's activity index nudged marginally upwards.

The non-residential sector was streets ahead in terms of orders. At 78, its index easily surpassed residential (61) and civils (61). Similarly, non-residential respondents were most optimistic about tender enquiries, although the difference between the sectors was less marked.

Employment prospects were relatively weak in all three sectors. Civils respondents showed the greatest confidence, and all three remained in the increasing zone, albeit just inside it in the case of residential and non-residential sectors.

Short-term activity outlook

According to Experian Business Strategies’ Leading Construction Activity Indicator (see graph below), construction activity is forecast to increase at a reasonably stable rate over the next three months. Activity should expand steadily in March, before a marginal slowdown is forecast to take effect in April. With
little variation between April and May, the indicator suggests any slowdown is likely to be confined to a single month.

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

Labour costs

Annual labour costs were higher for many residential and non-residential contractors than in December. In February, 47% of residential and non-residential firms reported annual labour inflation was running at more than 5% in February, compared with 42% three months ago. On the civil engineering side, however, there was a reduction in contractors reporting labour cost increases of greater than 5% – although the percentage remained high at 70% in February compared with 73% in December.

For the majority of residential and non-residential respondents, labour costs rose more moderately, between 2.6% and 5%. In December 64% of civil engineering firms reported labour cost increases in excess of 7.6%. This eased somewhat in February with the highest percentage of respondents reporting more moderate inflation between 5.1% and 7.5%.

(See graphic below: Labour costs)

Regional perspective

February’s results showed an improvement in many parts of the country. Seven region’s composite indicators – which incorporate activity, orders and tender enquiries to provide an overall indication of construction – increased. Only two regions’ composite indicators fell in February, and three remained unchanged from January. Essentially, all regions reported indices of 50 or above suggesting activity either stood firm or increased in all regions. This shows a marked improvement from both December and January when three and two regions respectively saw their indices drop below 50.

The North-east enjoyed the strongest increase, with its composite indicator rising four points to 63. However, construction activity expanded most rapidly in the East Midlands and Wales, with the composite indicator at 72 in both regions. Responses from our Welsh panel were consistently positive for the majority of 2005 and so far in 2006, with the Welsh indicator exceeding 70 for the past seven months.

Rises of less than four points were seen in Yorkshire and Humber, the East Midlands, the South-east, the West Midlands, the North-west and Scotland. The South-west’s composite indicator suffered a four point decline, although at 61 the index remains strong. In Northern Ireland the rate of activity growth also slowed and its composite index fell three points to 63. With a composite indicator of 50, Yorkshire and Humber continued to be the weakest region.
No change was seen in the Eastern and Welsh indicators. Responses from firms operating across more than one region were optimistic and the UK index stood firm at 65.

(See graphic below: Regional perspective)