Fears grow of W-shaped recession as output forecasts cut

The risk of a W-shaped recession has worsened over the last three months, economic consultancy Experian said as it severely downgraded its forecasts for the construction industry.

Continuing high levels of household debt, weak banks and rising unemployment could all conspire to create a second lurch downwards in the economy, it said in its quarterly update.

James Hastings, head of construction for Experian, said: “On the balance of probabilities we are still on a U shape but the risk of a W has increased since our last forecast.”

A “W” recession is one where a weak recovery is followed by further declines in output.

Experian says output will fall by 12% this year to £96.5bn; its forecast in April was for a 7.8% drop. It expects total new work to fall by 15.5% – significantly more than the 9.3% it was predicting in the spring.

The data follows even gloomier figures this week from the Construction Products Association (CPA), which expects output to fall by 16% in 2009, compared with the April forecast of 12%. Prospects for 2010 have also declined and the CPA’s forecast of a 5% drop contrasts with 3.4% in April. A survey from the Federation of Master Builders (see below), also out this week, indicated that about half of SMEs had seen a decline in workload in the three months to June.

Experian’s predictions for infrastructure remain relatively buoyant, with predicted growth of 3% this year and 15% in 2010. But Hastings warned cuts to major programmes would see the figures drop. He said: “We’ve assumed Crossrail goes ahead as planned. If it doesn’t, then the infrastructure forecast we’ve got for 2010 and 2011 would be a lot lower.”

The risk of a W-shaped recession has increased since our last forecast

James Hastings, Experian

He added: “The feeling is it’s going to be difficult for whichever government comes to power to back out of Crossrail completely. What may happen is the whole project is delivered over a longer period of time.”

Experian’s expectations for the private industrial and commercial sectors suffered the biggest change. They are expected to fall by 30% and 23% respectively in 2009, down from the 16% and 15% predicted three months ago. Predictions for the housing sector stayed almost steady, with predicted falls of 24.6% this year, returning to growth of 7.3% in 2010 and 10% in 2011. The repair and maintenance markets have also been suffering more than expected, Experian said.

The CPA is not expecting any significant increase in construction output until 2012 and says the industry will only have recovered to the levels of output achieved in 1999 by 2013.

Michael Ankers, CPA chief executive, said: “Cuts in government-funded schemes are almost inevitable after the election.”

But EC Harris chairman, Richard Clare, said public sector cuts would take time to have an impact on the sector. He said: “Do we really think whoever gets into power is going to cut 25% off everything? You can’t do that with construction. There will be a reduction over a much longer period. At the moment, there is plenty of public sector work.”

But others reported more positive signals this week. Economic research company Glenigan claimed government investment was beginning to filter through and said the public sector recovery was expected to gather momentum in the second half of the year.

Richard Clare, chairman of EC Harris said: “It is tempting to think building is all about residential and development. There is still a lot of pipeline work that is engineering-driven, such as renewables, nuclear and the new phase of development with the water companies that has to happen.”