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Construction industry lays foundation for recovery

At a glance

  • Despite a minor blip in figures, output on the increase and hopes of a broad-based recovery
  • London and the southeast leading charge with large-scale projects and office building
  • Broad upturn in housing and construction is likely to benefit ‘general’ construction industry, which is characterised by a large numbers of small firms – so brokers writing business for smaller to medium players likely to profit

After a long, post-financial crisis slump, the UK construction sector looked like it was staging a remarkable comeback in late 2013. Construction output surged at an annualised rate of more than 10% in the middle two quarters of 2013.

However, at the start of 2014 the latest figures from the Office for National Statistics suggested that the surge had faded in late 2013 – falling by 4% in November.

But evidence on the ground is suggesting that this is a mere blip, as the UK construction sector recovery gathers momentum.

And the November figure, in itself, is not really cause for despair. Construction output is now 2.2% higher than it was at this time last year. Although that is much less hopeful than the 5.1% rate it was running at back in October, it’s probably wrong to say that sentiment is souring.


Broad-based recovery

The miraculous recovery of the UK housing market, driven in part by various government initiatives to boost lending to homebuyers didn’t hurt and looks set to continue. And there are good reasons to think the recovery is more broadly based across the sector rather than just housebuilding.

The latest Purchasing Managers Index (PMI), a monthly barometer of the manufacturing sector conducted by economists Markit and the Chartered Institute of Purchasing and Supply, remained near the six-year high it reached a month earlier in November and at 62.1 was well above 50, which marks expansion in the sector.

In the survey, which recorded sentiment in December, 57% of managers expected growth in 2014 compared to 10% expecting decline. It’s a promising sign of marketplace momentum, suggesting increasing activity across the sector.

Steve McGuckin, UK managing director of global construction consultancy Turner & Townsend, is bullish. “The industry grew steadily in the second half of 2013, so the news that its momentum faded a touch in November is a surprise rather than a shock,” he said.

“Such a modest dip in monthly output is unlikely to interrupt the construction industry’s upward trajectory. The quarter-on-quarter numbers continue to march upward, and the pipeline of new orders remains strong. Headhunters tell me they’re busy again as the industry’s big players seek to hire the best talent. And where senior level recruitment leads, more junior jobs will follow.”

Rosanna Bortoli, spokeswoman for the building industry body the Construction Industry Council (CIC), says the recovery is still further ahead in certain sectors and regions than others, however.

Have your construction customers seen an upturn in business over the past 12 months?

It’s unsurprisingly led by London where new office building, conversion of office to residential, along with large-scale construction projects such as Crossrail and the conversion of the Olympic Games facilities continue.

“The recovery varies hugely by region and across sectors,” said Bortoli. “For instance, commercial work, in particular the office sector, tends to be focused in the London and the southeast. The picture is far from uniform.”

The latest PMI survey also noted that residential activity remains the fastest growing sector with commercial and civil engineering projects all seeing growth.

‘General’ construction industry to benefit

A broad upturn in housing and construction then is likely to benefit the ‘general’ construction industry, which is characterised by a large numbers of small firms – so brokers writing business for smaller to medium players are likely to benefit.

What about larger firms or those sub-contracting to them? Here there is a little bit more uncertainty.
With a general election looming in 2015, the fear is that current activity could be an artificially generated bubble that will change with government and new policies.

Will longer term thinking, planning and spending on large infrastructure projects on the scale of the next Hinckley Point nuclear power plant or the HS2 rail project prevail?

The CIC is optimistic that the Coalition Government’s 2025 Construction Strategy may actually serve to boost construction activity and give the sector some degree of security that the taps won’t suddenly get turned off.

November’s surprise dip is a minor distraction for a newly confident industry – for most of us, it remains a case of ‘don’t panic and keep digging’.”

Steve McGuckin, UK managing director of Turner & Townsend

Large scale energy projects, from nuclear to solar and wind are still in the pipeline and there are also a range of other exciting engineering projects such as Crossrail, Crossrail 2 and the Thames Tideway Tunnel either under way or in planning.

“One of the encouraging aspects of recent years has been a new tendency towards long-term thinking,” said Bortoli. “Examples of this include not only the 2025 Construction Strategy but also the production of National Infrastructure Plans and the appointment of a Chief Construction Adviser. On the other side of the fence, the Labour Party’s Armitt Review indicates some refreshing long-term thinking.”

But there’s still no guarantee every infrastructure project will go ahead. While the trend towards more long-term planning is promising, not every project will get funded. Nowhere is this more of an issue than in respect to energy projects, says Bortoli.

The industry must also meet the challenge of taking up the slack if growth is as rapid as hoped, given the fact it has shed staff in the recession and may need to skill up a new generation fast.

McGuckin at Turner & Townsend says that the industry is used to riding cyclical highs and lows, however, and while there may be bumps along the way to a full recovery the direction of travel is now clear. “Rapid expansion after such a long lean period means some growing pains are inevitable, but with careful cost planning, the business risk associated with growth can be mitigated,” he said.

“November’s surprise dip is a minor distraction for a newly confident industry – for most of us, it remains a case of ‘don’t panic and keep digging’.”

Image © Getty

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