Construction Remains Strong Despite Concerns Over UK Economic Prospects

9 November 2007

The construction industry grew firmly during the third quarter of 2007 and remains confident for the year ahead despite heightened uncertainty over the UK’s economic prospects, according to the latest joint Trade Survey Report from the Construction Products Association and the Construction Confederation. 

Construction products sales increased again during the third quarter, with 57% of firms on balance reporting higher sales than a year ago.  A third of light side firms reported that their sales volumes had increased by more than 5% compared to last year, the increase in heavy side sale volumes was more modest. 

Strong activity in the public new housing sector and a rebound in repair and maintenance activity were the principal drivers for the further strong rise in overall workload for Building Contractors.  In addition civil engineering contractors reported a further strong upwards trend in their workload, with current growth driven by strong activity in railway infrastructure, water and sewerage works, and site works for building developments.  Disappointingly, however, roads related works remains weak.

The overall rise in construction output during the third quarter was accompanied by a general increase in site labour recruitment difficulties.  More than 25% of building contractors reported that recruitment difficulties had prompted them to turn down work during the quarter. There was also a marked increase in firms reporting that labour shortages had contributed to the late delivery of work.

Commenting on the survey, Máren Baldauf, Economist at the Construction Products Association said: “This latest survey shows that light side manufacturers in particular continue benefit from strong sales growth, due to an increased demand for insulation and the government’s investment to improve the existing social housing stock.  Heavy side sales were ahead on the same period last year, though the pace of growth has moderated, reflecting the continued weakness of road investment and an easing in key new build sectors.  Whilst product manufacturers’ capacity utilisation edged up during the third quarter, the vast majority of firms report that available capacity is not expected to constrain output growth.  However, manufacturers continue to face upward pressure on their unit costs.  This maintains the pressure on their margins and as a consequence raises manufacturers’ selling prices.”

Stephen Ratcliffe, Chief Executive of the Construction Confederation said: “Contractors remain positive about  short-term and longer-term prospects although margins are being squeezed, due to both an increase in material prices and higher labour costs. This is despite a rise in tender prices.  Strong activity in the public new housing sector and a rebound in repair and maintenance activity are the principal drivers for construction growth, with building firms across all sizes benefiting from the increase in workload.
 
“It is good to see civil engineering contractors reporting a further strong increase in workload and employment. Continuing weakness in roads related work is clearly being offset by strong activity in railway infrastructure, water and sewerage works, and site works.”

Key survey findings are:

• Contractors report third quarter output was well ahead of both the preceding quarter and a year ago, with 37% and more than half of firms on balance reporting that output was up respectively.
• Construction products sales increased further during the third quarter, with 57% of firms on balance reporting higher sales than a year ago. On balance 82% of light side firms report that their sales volumes were up compared to last year and a third had seen sales rise by over 5%. Heavy side sales were also stronger compared to last year, with half of firms on balance reporting higher sales volumes. However the increase was more moderate, with the large majority of heavy side firms indicating that volumes rose by not more than 5%.  
• The products manufacturing industry remains very positive for the year ahead, despite forecasts of a slowdown in overall construction growth during 2008. A balance of three quarter of both heavy and light side firms anticipate higher sales volumes during the coming twelve months.
• Product manufacturers’ capacity utilisation edged up during the third quarter, but the majority of firms report that available capacity is not expected to constrain output growth.
• Civil Engineering contractors report a further strong increase in total civil engineering workload and employment. Continuing weakness in roads related work is offset by strong activity in railway infrastructure, water and sewerage works, and site works for building developments.
• Manufacturers’ continue to report widespread increases in their unit costs over the last year. All heavy side firms reported that their unit costs have increased and 60% indicated that their unit costs had risen by ‘over 5%’. In contrast, cost pressures appear to have eased for light side firms. The main drivers of unit costs remain higher raw material and fuel costs, although higher wages and salaries are an additional factor pushing up costs.
• Higher unit costs continue to filter through to manufacturers’ selling prices. On balance 83% of heavy side firms and 60% of light side firms report that their selling prices had risen in the third quarter compared with a year earlier.
• Contractors report that their building costs continued to increase, with cost inflation picking up during the third quarter. Contractors report rising material and labour costs have increased pressure on margins and contributed to an acceleration in tender price inflation.
• Contractors report that labour availability worsened during the third quarter. However, the availability of some specific trades, such as plasterers and carpenters improved, possibly reflecting the slowing in private housing activity. Labour constraints on work volumes also worsened during the third quarter. More than a quarter of firms reported that recruitment difficulties had prompted them to turn down work, while the number of firms reporting that labour shortages had contributed to the late delivery of work increased notably.