Construction output in February fell by 0.9% compared to January, the Office for National Statistics revealed on Friday, putting the industry on the verge of a “technical recession” of two successive quarters of negative growth.
[Update – ONS figures released last week do confirm that the industry is technically in recession – see our story here.]
January’s output fell 2.5% compared to December (a slight revision to the original figure of 2.6%). Meanwhile, in Q4 2014, the ONS said there was a 2.2% output fall in October compared to September, November’s output declined by 2%, and December saw a very slight rise of 0.4%.
That overall decline for Q4, plus the January and February figures, mean that unless there’s a sharp jump in output for March (or if the February figure is strongly revised upwards) then the industry could be in a technical recession from the next ONS update. The next statistical release will be published on 8 May, the day after the General Election [Correction – the preliminary figures were published 28 April, finalised figures are due 15 May.]
But at the same time, we have a very strong growth forecast in the latest quarterly bulletin from the Construction Products Association – with output predicted to be up 5.5% in 2015.
Although the CPA said that a slowdown related to post-election uncertainty is to be expected, it predicted that the growth trajectory will continue, with 4% growth in 2016 and 3.4% in 2017, followed by a bounce back to 4% growth in 2018.
The commercial sector will outperform the market as a whole, according to the CPA’s economics director Noble Francis, predicting growth of 5.2% in 2016 and 4.4% in 2017.
He added: “Overall the Construction Products Association forecasts construction output surpassing the pre-recession peak next year, and expects output in 2018 to be 17.9% higher than in 2014.”
All new work, seasonally adjusted Jan 2010 – Feb 2015 (£m)
Source: Construction: Output & Employment – Office for National Statistics
So how can the ONS’s conclusions on the recent past be so subdued, while the CPA looks forward with such optimism?
Brian Green, economist and commentator at Brickonomics, firstly points out that both the ONS data and CPA forecasts are ultimately based on surveys that are subject to a fairly wide margin of error.
These can be influenced by anything from “survivor bias” – where failed companies drop out of the survey pool, thereby flattering the response from the survivors – to uncertainties over how work should be classified in the ONS data. Is some offsite construction, for instance, being coded under manufacturing, when we might consider it to be construction?
Uncertainties are also created when the sample data is scaled up to draw conclusions about the industry as a whole, Green says. (The ONS data sample is fairly large, with around 8,000 companies – each with either 250 employees or a turnover above £60m – filling in a questionnaire each month.)
“There is enough in the figures to make you curious, but not enough to freak anyone out. You can find narratives to explain it without suggesting that we are going into recession.”
Brian Green, Brickonomics
But Green adds: “There’s enough here [in the ONS output falls] to make you start to raise an eyebrow. There are allocation issues, and for instance it could be that output figures are being depressed because large numbers of housing associations are taking work in-house [and away from contractors]. Then there’s a recorded problem with ‘deflators’, the way the ONS compensates for the effect of inflation on the figures – if there isn’t much inflation, then the correctives could be over-correcting.”
But Green also said he had analysed the ONS figures for January 2014 to February 2015 in cash terms – ie stripping out the ONS adjustments for seasonal variation and inflation – and concluded that there was steady build up in output until September 2014, and then a noticeable drop.
“There is enough in the figures to make you curious, but not enough to freak anyone out,” he said. “You can find narratives to explain it without suggesting that we are going into recession.”
For instance, he suggested that the effect of house builders mobilising stalled sites would have fed into much of the output growth recorded in late 2013 and 2014, and that this effect might now have levelled off.
But looking forward, he argued that growth in construction is strongly associated with levels of GDP growth – and that is highly dependent on the economic strategy of the incoming government.
