Construction output in Q3 revised down further

Reaction to ONS figures:

Steve McGuckin, UK managing director of the global programme management consultancy Turner & Townsend, said: “With output tumbling to its lowest level in 13 years, it’s almost as if the last decade’s construction boom never happened.

“The economy as a whole might be on the road to recovery, but the construction sector is stuck in reverse.

“The fragility of business confidence has taken a toll on private commercial construction. At 17.4% down on the same time last year, it has now fallen past even the low it reached in the 2009 recession.

“Infrastructure is showing some signs of life, returning to growth after falling earlier in the year. But it represents just 18% of new work, and the industry as a whole is still walking wounded.

“The decline in public sector non-housing work comes as no great surprise as the government’s austerity measures kick in. But at nearly a fifth down on Q3 2011, the drop has been precipitous.

“Many in the industry had hoped that if they could just limp through 2012, next year would be better. But with the sector continuing to contract, the optimists are being forced into a drastic rethink.

“Yesterday Balfour Beatty, the country’s largest construction firm by sales, was forced to issue a profits warning after its order book shrank by 4% in Q3.

“If well-run and diversified construction companies like that are struggling, life is becoming all but unbearable for the industry’s mid-sized firms.

“As the big players are being forced to pitch for smaller projects, those in the “squeezed middle” are having to slash margins to negligible levels - and in the most extreme cases, some firms are pitching for work at below cost, simply to keep cash-flow coming in.

“Such desperate measures are clearly unsustainable, and the industry as a whole is having to adapt to a tough environment which is still showing no sign of improving.

“With construction slipping from no growth to painful contraction, even stagnation is starting to look attractive.”

David Crosthwaite, an economist for construction and property consultant AECOM, comments: “Despite more positive news in the wider economy, via the much vaunted “Olympic effect”, construction continues its inexorable slide downwards with another month and quarter of falling output. It has now been a year with steadily declining output and the prospects going forward to the end of 2012 are not promising.

“The rate of decline shows no sign of slowing down and output in most sub-sectors is now significantly below the levels achieved at the beginning of the last decade.

“The question is what can anyone do to arrest the decline? Both public and private sector seem unwilling or unable to invest in built assets and until this position changes I’m afraid it’s likely to be more of the same.

Graham Robinson, construction expert at Pinsent Masons, said: “It is disappointing that in light of strong GDP figures for the quarter and a sharp upturn in output for infrastructure, the initial estimates for construction output have not been revised upwards but in fact have moved slightly further down.

“This is a further blow for the construction sector, with output declining by -2.6% quarter-on-quarter in the third quarter of 2012, compared with first estimates of -2.5% as released by ONS last month.

“The renewed downturn in commercial construction is a real worry, as this is a large sector for construction, and represents a worsening of the bleak picture for the industry.

“The worsening workload for construction will have a further knock on effect in employment in the sector, which reached a low point in the second quarter of 2012, showing that almost 400,000 of the entire workforce for construction have already lost their employment in the industry.

“Contagion is spreading along the construction supply-chain as input prices continue rising with the bleak outlook triggering further rounds of insolvencies over this winter period and no recovery for at least 12 months.”

Richard Lyle, director in KPMG’s infrastructure practice, said: “More grim news for the construction industry as activity falls again in September to 13.1%. Disappointingly, the picture for the construction sector in the UK this year has been essentially gloomy. It reflects what we are seeing in the market. The construction supply chain is having a difficult time in a very uncertain and unstable marketplace. Business confidence is fragile and this reflects the state of the broader economy. As a result, the largest slump in output has come from the private commercial sector.

“Unfortunately, this trend is expected to continue into next year and we are likely to see it persisting for the next 6-12 months.

“However, not all the data is dire - it was good to see new infrastructure output up by 9.9%, showing the largest quarter-on-quarter increase in growth. This could be a reflection of infrastructure projects benefiting from government incentives.

“Interestingly, growth was also highlighted by Markit/CIPS this month which showed construction output grow marginally from September to October. Hopefully, new orders will start to filter through and the forthcoming Autumn Statement will address some crucial issues around policy and delivery for the wider infrastructure industry through a revised National Infrastructure Plan, and a clear vision and strategy on finance and investment through the long-awaited outcome of the PFI review. It’s vital that we get business confidence back so next year the construction industry can stand on its own two feet and start moving towards growth.”