Best of times

You’re feeling really fat now, aren’t you? Those millennium blow-outs have stuffed you with food and drowned you in booze. How the hell are you going to get excited about work again after all those soporific days spent in your slippers?

Well, the good news is that the forecasters are predicting a bumper year for the industry, saying fears of a post-millennium meltdown for construction are unfounded. Obviously, there will not be any millennium projects up for grabs and the flow of lottery money is expected to slow. But the construction economy is still forecast to grow at a faster rate than it did in 1999, at about 2.1%. And better still, the trend is set to continue, with 2.4% growth expected in 2001.

So, where is the work coming from and who is spending the money? And which are the slump sectors to avoid?

Public housing

New build 2000: 0%; 2001: +4%

Repair and maintenance 2000: +8%; 2001:+8%

Construction Forecasting and Research’s predictions (above) are prompted by the long-awaited benefits of the government’s capital receipts initiative, which are expected to start feeding through in the next two years. This is money accumulated by local authorities from right-to-buy sales, most of which is expected to go on the repair and maintenance of existing stock.

“All the signs are that this will be a major growth sector for construction in the coming year,” says Allan Wilén, economist at the Building Material Producers.

The figures from the government are promising, too. Support for social housing (including capital receipts) should rise from £1bn in 1999/2000 to £1.8bn in 2000/01 and then to £2.3bn in 2001/02.

Private housing

2000: +3%; 2001: +3%

For all the talk of a housing boom, the strong market has not yet led to increased output. Prices and transactions showed good growth in 1999, but building activity (starts and completions) was roughly in line with 1998. “We are scratching our heads about this one,” says Chris Nicholls, economist at the Construction Confederation. “The most likely answer is that planning restrictions are limiting the amount of new building.”

Another possible contributing factor is the current trend for housebuilders to chase margins rather than volume. Most have been pushing down building costs and/or trying to go upmarket, but very few have any desire to be the next Barratt Homes.

Further interest rate rises are expected next year, which could dampen demand for homes. But most economists agree that the fundamentals of the market are good, and they expect house price inflation in the South-east to ripple out to other parts of the country. Some researchers expect a more volatile market than CFR does. Martin Hewes Associates, for example, predicts 4.9% growth this year and 2.3% next.

Infrastructure

2000: –2%; 2001: +5%

The Highways Agency’s projected spend does not give much hope for roadbuilders. The budget is £1.54bn in 2000/01 compared with £1.4bn in 1999/2000. These may be big figures, but they are put in perspective by the £1.77bn spent in 1995/96 by the last Tory government. Most of the money is expected to go on patching and mending.

The outlook is rosier in rail. Last summer, Railtrack said it planned to spend £27bn over 10 years. This has risen to somewhere between £35bn and £41bn after the Paddington disaster. And the extra cash is likely to be forthcoming sooner rather than later, as the government will want something to show the electorate before it goes to the polls. No surprise, then, that the forecasters say they are constantly having to revise their figures upwards.

Railtrack is planning to spend £500m on network enhancement in 2000/01, rising to £1.5bn in 2001/02 as the second phase of the Channel Tunnel Rail Link gets under way.

Public non-residential

2000: +4%; 2001: +3%

CFR’s figures for this sector may look unimpressive compared with the 12% growth actually achieved in 1999, but that was artificially enhanced by the glut of millennium projects.

The government’s Comprehensive Spending Review promised that capital expenditure on health would rise 20% in 2000/01 and 7% in 2001/02. Capital expenditure on education and employment will rise from £1.1bn to £1.6bn.

Chancellor Gordon Brown is also keen for local authorities to increase private finance initiative investment. He promised £800m in both 1999/2000 and 2000/01. However, with much of this earmarked for housing, the real issue for the industry in the coming year will be the establishment of Partnerships UK, the new body to oversee PFI investment. Most expect that it will put an end to the recent hiatus in new PFI projects and bring down their cost.

Private industrial

2000: –12%; 2001: –2%

Manufacturing output rose in both the second and third quarters of 1999, giving hope for a recovery. But the rise has come from a very slow base – most industrial firms have been down in the dumps for the past two years; the strong pound has meant that exporters are doing particularly badly.

One growth area has been warehousing and distribution. But manufacturers are unlikely to spend a lot on building while they are emerging from recession. If they have spare capacity and start to see their order books pick up, they are likely to invest in improving efficiency rather than increasing capacity.

Private commercial

2000: +4%; 2001: –3%

This has been a very strong market in recent years, reflecting the growth in the service sector. But most forecasters agree that the boom cannot be sustained at its present rate. CFR, for example, says commercial output grew 12% last year but will fall back in 2001.

“We are back to the activity levels of the 1980s boom,” says the Construction Confederation’s Nicholls. “Compare the £2.6bn of commercial construction output in the second quarter of 1990 with £2.5bn in the third quarter of 1999.” So, ripe for a crash then? Not according to Nicholls: “There is little speculative development, which suggests that the market is sustainable.”

Spending on entertainment and leisure is set to settle down, too. DETR figures show that construction of entertainment facilities such as sports stadia and cinemas rose a whopping 40% in 1997 and a more modest 15% in 1998. Nicholls believes that there was double-digit growth in 1999 but that a lot of millennium-related projects will be coming to completion, restricting growth this year.

Private housing repair and maintenance

2000: +3%; 2001: +3%

As this sector is driven by the number of transactions in the housing market, most economists are slightly more bullish about its prospects than CFR’s prediction of a steady 3%. Transactions are expected to stay steady or rise because unemployment is low, interest rates are not likely to rise over 6.5% and consumer confidence is picking up. “When those three are all true, people start doing all sorts of things to their houses,” says Nicholls.

Public non-residential repair and maintenance

2000: +2%; 2001: +2%

Most economists agree that increased government support for dilapidated schools and hospitals will help this sector in 2000.

Private non-residential repair and maintenance

2000: +2%; 2001: +2%

This sector tends to be linked to corporate profitability. So, with the economy in good shape, steady growth is expected.