Swings and roundabouts

DETR records show that the total volume of construction output continued to climb in the fourth quarter of 1999, up 1% compared to the previous quarter (figure 1). This was attributed to a growth in new work, in particular an increase in the infrastructure, private industrial and private commercial sectors.

The total volume of new work in the fourth quarter of 1999 was 2% up on that of the previous quarter, although there was a 1% drop in the volume of repair and maintenance work.

Fourth quarter figures for the housing sector showed new private work was 7% down on the previous quarter. Conversely, new work in public housing saw a 7% increase.

The DETR recorded fourth quarter increases in 1999 for new infrastructure output (9%), new construction work in the private industrial sector (6%) and new private commercial output (5%). New work in the public non-housing sector saw a 3% decrease in the fourth quarter of 1999.

The DETR's value for total construction output in 1999 represented the culmination of four years of steady growth, with 8% more work undertaken in the industry than in 1995. New work increased by 15% over this period, 4% of which can be attributed to 1999. Private commercial sector made up 71% of the new work undertaken last year. The outlook for the next two years suggests continuing growth, although the emphasis may shift from the private commercial sector to housing, the public sector and repair and maintenance work.

The DETR's figures for new orders show a 9% drop compared with 1998 and less than the annual total for both 1997 and 1996. Significant falls were registered in the private commercial (9%), private industrial (14%) and private housing (12%) sectors.

The decline in private commercial orders was led by the retail sector, a trend which was anticipated by the planning restraints imposed on out-of-town developments. The impact of e-commerce is also adding to the uncertainty of the retailing sector. Davis Langdon & Everest (DLE) sees output being 4% – 5% higher for the commercial sector as a whole before stalling in 2001, with growth coming from pfi projects in health and education.

The latest Budget had little impact on the construction industry, but increased emphasis on public spending for health and education should lead to an increase in construction activity in these areas, filling the gap left by declining commercial and industrial work.

If the overall output of the industry continues to grow as predicted, material prices may begin to rise for the first time in three years as raw material prices increase. Materials costs fell by 1·8% in the year to January 2000, mainly due to the strength of the pound reducing the cost of imported components and raw materials. However, prices have risen by 1·5% since mid-1999. This may continue as mechanical component suppliers have faced price hikes in aluminium, copper and refrigerants.

According to DLE tender prices are forecast to rise by 5% – 7% over the year to the first quarter of 2001. The mechanical cost index rose by 2·2% over the year to the first quarter of 2000.

The m&e services sector has experienced increased demands on its capacity over the last couple of years. This has resulted in labour shortages, particularly electricians, in current hotspots. Tender prices have risen by over 10% in the last year where workload is buoyant.

The Construction Products Association is also bullish, predicting construction activity output 5·5% higher by the end of 2001.

With business investment at an unsustainable all-time high, a cyclical downturn seems inevitable

What to expect in the short-term

While Hewes & Associates reported a considerable slowing down in construction activity during 1999, it forecasts output to remain relatively stable in 2000, with a 2% rise in the following two years.

The decline in orders for the third quarter of 1999 is to blame for the short-term outlook, and for the year Hewes estimates a fall of around 6% in orders. After growing 2·8% in 1999, the volume of new work is forecast to fall by 2·5% in 2000 (figure 2). The poor short-term outlook for new work relates to declines in infrastructure, industrial and commercial workloads.

The outlook for repair and maintenance looks more positive. After an estimated drop of 1·8% in 1999, growth of over 10% is forecast for 2000 – 2002. Residential and non-residential public sectors are expected to perform well.

A sharp investment in the public sector is expected to help negate the decline in new work relating to the private sector (figure 3).

With business investment at an unsustainable all-time high, a cyclical downturn seems inevitable, says Hewes. This is likely to affect the industrial and commercial building sectors.

While this factor will be offset somewhat by the growth in public sector investment, Hewes says it is worth bearing in mind the "unwinding" of £4 billion of Millennium schemes and the reduced emphasis on National Lottery funded projects.

BSRIA has its say

The most recent BSRIA quarterly survey of consultants² shows that workload has increased on the last quarter, although the rate of change has slowed.

The 139 firms who took part in the survey reveal that profitability has increased after a sharp drop in the previous quarter; the general trend remains positive but there is an overall profit reduction compared with the same quarter in 1998. With workload increasing but fee income remaining comparatively static, it is clear that m&e consultants are continuing to have to cut costs to remain competitive.

According to BSRIA, engineers remain optimistic about the office sector although less so than in the last quarter, probably a reflection of the decline in orders. The industrial sector has dropped further, with investment taking longer to filter through. The retail sector has remained at a similar level for the past three quarters while optimism has reduced slightly in the leisure sector. This ties in with the view that tighter profit margins and limited planning permissions are leading to reduced orders for the retail sector.

Market saturation, together with less marked growth in sales, indicates that the recent upturn in entertainment buildings is not sustainable. Increased spending commitments in the health subsector has lead to a sharp rise in optimism for the public sector (figure 4).

Construction Forecasting & Research found that both activity and tender enquiries dropped during February5 although there was a marginal improvement for order books. Tender prices and short-term employment prospects also fell.

Its survey suggests order books are healthiest in the north, which saw a marked increase during February.

Glenigan says that the February figures for contracts awarded were the lowest since December 19986. However, following the strong month for January, it still takes the view that the construction industry is set fair for the foreseeable future.

The commercial sector bore the brunt of the February fall. Combining the past three months, orders were 23% above the previous three months and 12% above the same period a year ago. However the slowdown in contract letting in mid-1999 has meant that the level of orders over the past 12 months is down 10% on the previous 12 months. Glenigan suggests that with high levels of work in progress there will be no halt to output growth for some months.

Despite the reduction in the amount of work secured in the health sector over the last year, recent figures show a significant rise over the past three months compared with a year ago. Education continues to expand, with a third more work let over the past 12 months compared with the previous year. Both the health and education sectors continue to look enticing for the construction industry. Glenigan described the industrial sector as "showing the least signs of life".

So what seems to be the general consensus for 1999 and the coming two years? New orders have fallen over 1999 which will result in a reduction of short-term output. A revival in public housing looks set. Leisure and retail outlook is gloomy while public spending on health and education looks bright.