Economic Overview Winter 2011-12

Construction activity is set to endure a sharp fall of 5.2% in 2012, and remain subdued throughout 2013, before a return to growth in 2014. The Association's central forecast reflect the increasing pessimism of the UK's economic performance, which coupled to sharp public sector cuts, indicate the fall in 2012, a rise of just 0.4% in 2013 then growth of 3.8% in 2014 and 4.6% in 2015.

Although the government's Autumn Statement in November heralded a £4.7 billion 'boost' for construction, capital investment will still fall 30% by 2013/14. Furthermore, 85% of this 'boost' will not be available between 2010/11 and 2013/14 and, as a consequence, is unlikely to have a significant impact in the next 18 months. As a result, public sector construction is still set to fall 20% between 2010 and 2014 as work completing on the 2012 Olympics coincides with falls in workloads in education and health facilities of 35% and 40% respectively over this same period.

Near term, the fall in public sector work is expected to be exacerbated by a marginal fall in private sector construction during 2012. The last three months have seen further downward revisions of expectations about economic activity, especially in the light of heightened concern regarding the euro zone, the UK's largest export destination and, in addition to rising unemployment, this has negatively impacted upon consumer confidence. Commercial is now anticipated to fall 5% in 2012 and remain broadly flat in 2013, before significant growth in 2014. The indications over the past three months are that even the buoyant London offices market is slowing and there are serious questions hanging over the future of the £4.5 billion Battersea Power Station regeneration project as its current owners fell into administration in November.

Despite the pessimism, there are areas within the construction industry that are anticipated to grow. Private housing starts are expected to grow by a 2%, in 2012, before more certainty over economic recovery and greater consumer confidence, combined with measures in the housing strategy, boost private housing recovery and 29% growth is expected between 2013 and 2015. Despite low, and falling, consumer confidence, retail construction continues to recover from the 26% fall experienced in 2008 and 2009. Driven primarily by expansion plans from major supermarket chains, retail construction is expected to grow 3% in 2012 before stronger consumer confidence and stronger economic recovery lead to 5% growth per year between 2013 and 2015. The infrastructure sector is set to grow in each year of the forecast, buoyed by accelerating growth in work in the rail and energy sub-sectors. Rail construction is expected to rise 90% during the forecast period, with funding fixed in a five year spending plan and isolated from spending cuts until 2014. Energy construction is set to rise threefold by 2015 with the main works on the first of the new nuclear power stations set to begin in 2013 and continue over the next decade.

In the near term, the greatest concerns for the industry are the fall in capital expenditure for public sector construction and the inability of the private sector to offset this. As a consequence, 2012 and 2013 are likely to be extremely challenging for the industry.

Key points include:

• Construction output to fall 5.2% in 2012 before only marginal growth of 0.4% in 2013
• Total housing starts in 2012 less than half needed to meet number of households created
• Public sector construction work to fall by 18% between 2011 and 2014
• Private sector construction work to rise by 14% by 2015
• Rail construction set to almost double by 2014
• Energy construction set to rise threefold by 2015