Out-Law News 2 min. read

UK construction industry optimistic of growth in 2014, but experts warn of "unsustainable" recovery

More than half of UK construction firms expect to see an increase in business activity over the coming year according to a survey, which also recorded growth in the sector for the eighth consecutive month.

However, construction experts at Pinsent Masons, the law firm behind Out-Law.com, warned that the results of the latest survey of construction purchasing managers (3-page / 382KB PDF) by economists Markit and the Chartered Institute of Purchasing and Supply (CIPS) indicated a trend towards "unsustainable" growth.

The December construction purchasing managers' index (PMI) figure was 62.1; only slightly down from November's 75-month high of 62.6 and well above the 50.0 value that indicates growth. PMI data is collected via a monthly survey of more than 170 purchasing executives working within the construction sector, based in businesses of all sizes.

Although the residential property subsector continued to record the fastest level of growth, Markit and the CIPS also found "strong" rises in commercial and civil engineering construction output. In particular, work on commercial projects increased at the fastest rate since August 2007; while the growth in residential construction was slower than that recorded in November, the survey found.

"The sector is still about 10% down on where it was pre-recession, so whilst these results are encouraging – particularly in the number of consecutive months of growth, and that there is now growth in commercial construction and engineering and not just housing - the industry must not get carried away," said Chris Hallam of Pinsent Masons.

"Lots of companies in the industry are still hurting and struggling to make ends meet, and the effect of growth is yet to filter down into the pay packets of employees who continue to face real terms pay decreases," he said.

Graham Robinson of Pinsent Masons said that the industry was right to be "reasonably optimistic of a 'bounce'" in output in the short term, but that the longer term prospects for the sector were not so clear.

"Output less than six months ago was on the floor, after a trough around 20% lower than pre-recession peak," he said. "However, there are real concerns that the economic recovery that is helping to drive construction output is not sustainable."

"Growth in the housing sector is being driven almost entirely by government stimulus, as well as foreign investment in London, which seems to have now slowed considerably compared with the last few years. Economic recovery is being driven by increased consumer spending and is to a large extent credit-fuelled; hence this type of recovery isn't sustainable, especially as households are squeezed. Capital investment by business hasn't picked up and there is still a high level of vacant property," he said.

Figures from construction sector research firm Glenigan, covering the three months to the end of 2013, noted that the value of non-residential projects begun had increased by 21% when compared to the same period in 2012. The index as a whole had increased in value by 15% over the same period in 2012, it said.

The Markit/CIPS survey noted that the rate of new order growth had eased slightly since November, but still remained relatively steep. This in turn was continuing to drive staff recruitment in the sector, which reported increased workforce numbers for the seventh consecutive month - the longest continuous period of job creation in five and a half years, according to the researchers. At 57%, the proportion of companies expecting output to grow still further was considerably higher than the 31% recorded at the end of last year.

"Continued strong expansion marked an outstanding end to 2013 for UK construction, positioning the sector on a solid recovery path for 2014," said CIPS chief executive David Noble. "Whilst housing remained the fastest growing activity and civil engineering maintained its pace, commercial activity reported the sharpest rate of expansion since August 2007; an indicator of the broadening out of the recovery. The positive business outlook and soaring confidence reported in December suggests this upswing will be maintained well into the New Year."

"The natural consequences of the rapid jump in construction activity during 2013 have been the continued squeeze on stocks at supplier level and the lengthening of delivery times. These pressures, alongside increasing business costs, will remain in 2014, but with hopes that they won't prolong," he said.

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