So far 2017 has been a year of steady but unspectacular growth for the UK economy. However one sector has stood out on the downside and that is construction. Of course this is the opposite of what the unwary might think as we are regularly assailed with official claims that house building in particular is a triumph. But the pattern of the official data series is certainly not a triumph.
Construction output contracted by 0.9% in the three-month on three-month series in September 2017…….This fall of 0.9% for Quarter 3 (July to September) follows a decline of 0.5% in Quarter 2 (April to June), representing the first consecutive quarter-on-quarter decline in current estimates of construction output since Quarter 3 2012.
Whilst our official statisticians avoid saying it this is the criteria for a recession with two quarterly falls in a row and in fact they had revised it a bit deeper.
The estimate for construction growth in Quarter 3 2017 has been revised down 0.2 percentage points from negative 0.7% in the preliminary estimate of gross domestic product (GDP), which has no impact on quarterly GDP growth to one decimal place.
The last month in that sequence which was September showed little or no sign of any improvement.
Construction output fell 1.6% month-on-month in September 2017, stemming from falls of 2.1% in repair and maintenance and 1.3% in all new work.
Here is an idea of the scale of output.
Total all work decreased to £12,628 million in September 2017. This fall stems from decreases in both all new work, which fell to £8,209 million, and total repair and maintenance, which fell to £4,419 million.
And here are the declines.
Construction output fell by £361 million in September 2017. This fall stems predominantly from a £236 million decrease in private commercial new work, as well as a fall of £165 million from total housing repair and maintenance.
There may be some logic in new commercial work being slow but the fall in repair and maintenance seems odd to say the least. The issues for the former might be that there has been so much building in parts of London combined with uncertainty looking ahead in terms of slower economic growth and what the Brexit deal may look like.
Maybe we are seeing some growth in new house building if we look at the longer trend.
Elsewhere, the strongest positive contributions to three-month on three-month output came from housing new work, with private housing growing £138 million and public housing expanding by £65 million.
This weaker episode followed what had been a very strong phase for the UK construction industry. The nadir for it if we use 2015 as 100 was 85.3 in October 2012 as opposed to the 105.9 of September this year. Over this period it has been even stronger than the services sector which has risen from 93.7 to 104.4 over the same period. Of course at 6.1% of the UK economy as opposed to 79.3% the total impact is far smaller but relatively it has been the fastest growing of the main UK economic categories in recent times.
If we look back to possible factors at play in the turnaround it is hard not to think yet again of the Funding for Lending Scheme of the Bank of England which was launched in the summer of 2012. There is a clear link in terms of private housing in terms of the way it lowered mortgage rates by more than 1% and the data here makes me wonder if some of the funding flowed into the commercial building sector as well. At this point we do see something of an irony as of course the FLS was supposed to boost lending to smaller businesses but sadly many of those in the construction sector were wiped out by the onset of the credit crunch.However this from the TSB suggests an impact.
As part of our participation in the Funding for Lending Scheme*, we have reduced the interest rate by 1% on all approved business loan and commercial mortgage applications.
Indeed some loans were made although as Co Star reported in January 2013 maybe not that many.
The Lloyds FLS-funded senior loan funded last Friday. Kier said the “competitively-priced” £30m loan will be used in connection with its infrastructure and related projects.
This is understood to be only the second commercial real estate loan drawn by Lloyds’ Commercial Banking division under the FLS scheme, after the bank drew down a further £2bn under the scheme before Christmas, taking its total capacity to £3bn.
The issue is complex as the Bank of England itself was worried about the state of play in 2014.
The majority of the aggregate fall in net lending in 2014 Q1 was accounted for by a continued decline in lending to businesses in the real estate sector (Chart 2).
One area that I think clearly did see growth but is pretty much impossible to pick out of the data is lending to what are effectively buy-to let businesses.
There has been a flicker of winter sunshine this morning from the Markit PMI business survey.
November data pointed to a moderate rebound in
UK construction output, with business activity rising
at the strongest rate since June. New orders and
employment numbers also increased to the greatest
extent in five months.
Indeed in an example of the phrase “there is a first time for everything” the government may this time be telling the truth about house building.
House building projects were again the primary
growth engine for construction activity. Survey
respondents suggested that resilient demand and a
supportive policy backdrop had driven the robust and
accelerated upturn in residential work.
Whilst the overall growth was not rapid at 53.1 ( where 50 in unchanged) at least we seem to have some and it was reassuring to have another confirmation of my theme that the 2016 fall in the UK Pound £ is wearing off.
However, cost inflation eased to its least marked for 14 months, with some firms reporting signs that exchange-rate driven price rises had started to lose intensity.
So the overall picture is of a boom which then saw a recession and hopefully of the latest surveys are correct a short shallow one. However not everyone is entirely on board with the recession story as this from Construction News last month points out.
Industry activity continued to grow between July and September, according to a new survey by the Construction Products Association.
The official data series in the UK for construction has been troubled to put it politely. The official version is this.
The Office for Statistics Regulation has put out a request for feedback and comments from users of these statistics, as part of the process for re-assessing the National Statistic status for Construction statistics: output, new orders and price indices.
In essence you cannot say what real output is until you have some sort of grip on the price level. Also the excellent Brickonomics pointed out several years ago that some of the improvement in the data was via simply transferring a large business from services to construction. Solved at the stroke of a pen? Also this year there were large revisions to last year which is not entirely reassuring.
The annual growth rate for 2016 has been revised from 2.4% to 3.8%.
If that error was systemic then this years recession could easily be revised away. The truth is that there is way too much uncertainty about this which is surprising in the sense that the industry relies on physical products many of which are large. A few weeks back I counted the number of cranes along Nine Elms ( 24) for example in response to a question asked in the comments.
So we had a boom ( maybe) followed by a recession (maybe) and are now recovering (maybe). Hardly a triumph for the information era…..
Here is a once in a lifetime opportunity to hear Donald Trump as a Talking Head.