Continued growth for construction industry despite medium-term uncertainty

cpaConstruction output is forecast to increase by more than 17% by 2018 according to the latest estimates from the Construction Products Association (CPA), but growth is expected to slow in the medium-term due to election uncertainty and capacity constraints.

The CPA’s construction industry forecasts for 2014-2018 suggest that the industry will grow by 5.3% in 2015, and a further 12.2% in the following two years.

With estimates slightly higher than those recently put forward by the Construction Industry Training Board (CITB), the CPA says private house-building is set to rise 10.0% in 2015, suggesting a decrease in growth from 2014’s level of 18%. This slowdown is expected to continue over the forecast period, with the sector thought to grow by an estimated 20.2% by 2018. Meanwhile, commercial construction is set to grow by 21% by 2018, while infrastructure is thought to be in for a massive period of growth, increasing by 51.5% over the forecast timeline. This suggests that the recent resurgence of construction – which has arguably been fuelled by house-building – will be fuelled by new areas of activity.

However, the CPA has anticipated that post-2016, small and medium-sized house-builders will be driving the growth. These firms were the most affected by the financial crisis, and previous recession but recent evidence from the National House-Building Council (NHBC) has suggested that private housing starts for the smallest builders, who provide ten or less units, in 2014 were approximately 40% higher than a year earlier. While small house-builders currently only account for around 5% of the residential construction market, it is expected this share will increase substantially over the next four years.

Public sector construction is forecast to rise just 2.5% per year between 2015 and 2018 as further austerity focuses on current spending.
Dr. Noble Francis, economics director of the CPA, believes uncertainty surrounding the fallout of the General Election is thought to be responsible for the overall reduced growth expected in the short term. He said:
“Growth rates across most of the industry are expected to slow in 2016 and 2017 because of uncertainty regarding the General Election in May, which could give pause to both contract awards and industry investment. Whilst this is unlikely to impact construction activity this year, due to the lag between contracts and activity on the ground, it may have an adverse effect on output in both 2016 and 2017.”

Dr. Francis added:
“The industry also has concerns regarding capacity constraints in the medium-term. Whilst output in the sector during 2014 was 8.5% below the level seen in 2007, overall capacity last year was not a key issue. However, construction output is forecast to surpass the pre-recession peak during the next 18 months, this despite the industry having lost 343,000 jobs and considerable materials capacity in the seven years following the financial crisis. As a result, it is essential that there is significant investment in UK construction skills and manufacturing over the next few years if the growth forecast is to be achieved.”

Continued instability in the Eurozone, particularly following the election in Greece and elections during 2015 in many other EU countries such as Portugal and Spain, is also expected to remain a concern regarding medium-term growth.

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