Construction Forecasts Construction forecasting and research Winter 2013/14 Edition Volume 20: Issue 1 Winter 2013/14 Construction Forecasts 2014 – 2016 A report by the Forecasting Committee for the Construction Industries Construction Forecasting & Research from Experian Published by Experian – Economics, Decision Analytics Cardinal Place 6th floor 80 Victoria Street London SW1E 5JL T: 0203 042 4000 F: 0207 746 8277 http://www.experian.co.uk/economics/ January 2014 This report has been prepared for publication by Construction Forecasting & Research, which is part of Experian’s Economics Unit, with guidance from its Forecasting Committee for the Construction Industries. The members of the committee serve in a personal not a representative capacity. The contribution of the members, and that of the Forecasting Groups (listed in Appendix H), is gratefully acknowledged. Whilst every endeavour has been made to obtain the best available data from appropriate sources, Experian’s Business Strategies Division can give no guarantee of accuracy, nor for the applicability of the forecasts for particular decisions. No responsibility is taken for any consequential loss or other effects from these data. Copyright © Experian ISSN 0308-079X Apart from fair dealing for the purposes of research or private study, or criticism or review, and only as permitted under the Copyright Designs and Patents Act 1998, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the Publishers or in the case of reprographic reproduction in accordance with the terms of the licences issued by the Copyright Licensing Agency in the UK. US copyright law is applicable in the US. Printed by PAPCOM Construction forecasts 2014- 2016 Winter 2013/14 A report by the Forecasting Committee for the Construction Industries Contents Page Executive summary 1 1 Macroeconomic outlook 10 2 Housing 16 3 Housing repair, maintenance and improvement 26 4 New infrastructure 32 5 Public non-residential construction 52 6 Private industrial construction 63 7 Private commercial construction 71 8 Non-residential repair and maintenance 88 Appendix A: Health and education output Appendix B: Construction output in current prices Appendix C: Regional housing data Appendix D: Regional infrastructure data Appendix E: Regional public non-residential data Appendix F: Regional private non-residential data Appendix G: Definitions: types and examples of construction work Appendix H: Membership of the forecasting committees Construction Forecasts 2014 – 2016 Executive summary A SHORT STATISTICAL NOTE There have been significant revisions to both the new orders and output data series during 2013 that require comment. In the case of new orders, a different methodology has been adopted for the collection of data from the second quarter of 2013. Prior to that date new orders data was collected directly by the Office for National Statistics by a survey of contractors in the industry. Since the second quarter of last year collection of new orders data has been entrusted to Barbour ABI, an organisation that tracks the commissioning of construction work through the planning system. ONS expresses the belief that the new collection methodology will provide a more comprehensive view of new orders as coverage is closer to a census than a sample. However, concerns do currently exist about how the inevitable discontinuity between first quarter and second quarter 2013 data has been treated and a response from ONS is awaited on this issue. As a result we are currently treating the strong growth rate seen between these two quarters with an element of caution. On the output side, constant price data has moved to the annual chain-linked methodology and away from the five-year fixed base methodology previously used. This was an inevitable development given that construction output data forms part of National Accounts and most other indicators have long since moved to the chain-linked methodology, which is the preferred methodology of Eurostat. Annual chain-linking is a method for aggregating the volume measures on a more frequent basis. It can be thought of as rebasing every year; thus instead of referring back to value shares from the most recent base year, volume measures for each year are produced in prices of the previous year. These volume measures are then ‘chain-linked’ together to produce a continuous time series. The main benefit of chain-linking is that as the weighting is updated every year it will more accurately reflect the importance of various sectors in the economy. The primary drawback to chain-linking is a loss of ‘additivity’, that is, prior to the base year the sum of the parts will not equal the total. THE ESTIMATED OUTTURN FOR 2013 The strength of the economic recovery in the past few months has caught many forecasters on the hop. The median of independent forecasts for GDP published by HM Treasury in June was still a modest 0.9 per cent for 2013, but by December this had risen to 1.4 per cent. Experian tended to be close to the consensus, with a GDP forecast of 1 per cent for 2013 in June, which had risen to 1.4 per cent by December. The turnaround for the construction industry has been even more marked, although this has been due in no small part to significant revisions of construction output data by the ONS over the past few months. The latest of these in December added nearly £1.5bn in 2010 prices to output in the construction industry in the first three quarters of last year, taking the year-on- year change up from -0.3 per cent to +1 per cent. Thus the outturn for the year as a whole will now almost certainly be positive, given that the trend is one of accelerating growth at present. Both the public and private housing sectors have experienced output on a rising trend in recent quarters, and for private housing the third quarter 2013 outturn, at £4.5bn at 2010 prices, was the best since the second quarter of 2008. In the public sector, while funding under the 2011 to 1 Construction Forecasts 2014 – 2016 2015 Affordable Housing Programme (AHP) is much lower than in the 2008 to 2011 period and led to a sharp contraction in output in 2012, social housing providers have become much more adept at accessing finance from other sources, with borrowing facilities totalling £69bn in the three months to September 2013. There is little doubt that the Help to Buy scheme has provided a significant boost to the housing market, with a small step-change in levels of output in the second quarter of last year after the introduction of the equity part of the scheme in April. The mortgage guarantee element, which was introduced in October, three months ahead of schedule, has further enlivened the market, so much so that the Bank of England has decided to redirect the Funding for Lending scheme away from the mortgage market and towards small businesses from February this year, partly to assuage fears of a house price bubble – although primarily to address the lack of lending to SMEs. Thus private housing output could be close to 10 per cent higher in real terms in 2013 compared with the previous year. However, that will still leave activity some 28 per cent lower than its 2006 peak. Not surprisingly, public non-residential output has continued to decline and is likely to be some 10 per cent lower in 2013 than in the previous year. The Building Schools for the Future (BSF) ‘legacy’ project pipeline is now reduced to a few schemes in the Wolverhampton area, while the Priority School Building Programme is largely privately financed; thus the output should appear in the commercial construction sector. However, while overall construction expenditure on schools and colleges continues to decline, for universities it has been expanding as higher education institutions battle it out to attract students. The infrastructure sector continues to see output sustained at a high level, albeit a bit off its peak in 2011. Activity is estimated to have grown by about 2 per cent in real terms in 2013. Work on Crossrail is now approaching its peak, which is scheduled to be 2014/15, with activity also ongoing on a welter of other major projects in the sector such as redevelopment of London Bridge rail station under the Thameslink programme, station redevelopments at Victoria, Bond Street and Tottenham Court Road, the Queensferry Crossing in Scotland and a number of managed motorway schemes across England. The commercial construction sector was showing no growth until a sudden acceleration in activity in the third quarter of last year. While demand for office and retail space had been returning to the sector generally since the beginning of the year it can take some time for this to translate to work on the ground and thus it was not until the third quarter of the year that we saw a significant upswing in output, of around 7 per cent quarter-on-quarter in real terms. It is the office sub-sector that is largely driving growth, with some analysts expecting activity in London to reach a 10-year peak in 2014 and speculative development to return to some of the main regional markets after a long period of dormancy. Activity in the repair and maintenance sectors (R&M) overall was largely flat in the first three quarters of 2013, with only infrastructure R&M and, surprisingly, the public non-residential R&M sectors showing any real growth. Public housing R&M continues to suffer from the severe financial constraints that local authorities are under while the private housing side remains impacted by pressure on real household disposable incomes, although some growth in the sector is expected for 2013.