Friday, December 16, 2016

UK Construction market review 2016 and what lies ahead

As 2016 draws to a close it's worth reflecting on the changes the construction industry has seen over the last 12 months.
This time last year, confidence levels in the UK economy in general - and in construction activity in particular - were relatively buoyant. AMA's Forecast Bulletin in January 2016 indicated projected growth rates of 2.3% in GDP, with overall construction output forecast to grow by 5-6%. The EU Referendum was a distant landmark and most independent forecasts were for a vote to 'Remain', and that construction would make a positive contribution to prospects for the economy in 2016.
Housebuilding was regarded as one of the strongest sectors for growth, building on rising confidence levels, growth in real incomes and a range of Government support initiatives aimed at helping first -time buyers into the market. In the non-residential sector, infrastructure and office construction were forecast to be the most buoyant sectors for 2016 - each forecast to grow by around 7%.
However, the surprise result of the Referendum had an immediate impact on construction, with leading housebuilders' share prices falling dramatically the following day and the sector generally experiencing a loss of confidence. Fortunately, this didn't last too long and the last few months have seen something of a recovery across most sectors. Housebuilding volumes haven't fallen off a cliff and sales levels have recovered strongly with prospects for 2017 looking more buoyant than they were just a few short months ago. The political focus on increasing the number of new homes is continually rising, with the shortage of affordable housing now recognised as one of the major issues and set to drive a range of initiatives to increase output over the medium term.

As the chart above shows, our latest forecasts for 2016 indicate a modest increase in output, though more recent surveys have suggested that this may prove optimistic with a decline in some sectors impacting on overall output levels.
So, what are the prospects for 2017?
In a wider context – and in the light of the Brexit vote - forecasts for the economy in 2017 have been cut to around 1% growth in GDP. But, it’s worth emphasising that forecasts for 2016 were also initially cut in response to the Referendum and have proved too pessimistic, resulting in recent upward revisions to around 2.1%. Our current forecasts are for around 2% growth in overall construction output with the industry set to pass £150 billion in total value.
This forecast is built on a combination of modest growth in the housing market, while the non-residential sector is expected to experience mixed fortunes.
As the chart below shows, housing and infrastructure represent 2 major sectors of the construction industry, accounting for 41% and 19% respectively in the first 6 months of 2016. 
As indicated above, housebuilding has proved more buoyant than anticipated, while infrastructure spending has also risen up the political agenda. Lack of investment in infrastructure is regarded as a barrier to growth in the economy and, while uncertainty still surrounds major projects such as HS2, Hinkley Point and a new airport runway in the South East, the overall level of investment in energy and transport infrastructure is set to rise and should contribute to steady rates of growth in construction output.
As for the medium term, the underlying performance of the economy - together with consumer and business confidence levels – will be the key drivers of construction activity. Undoubtedly, the Brexit vote and negotiations will continue to cast a shadow over the next 2-3 years at least, but as the last 6 months have already proved the construction sector has proved more resilient than anticipated and the sector remains a good target for Government support and initiatives to help underpin the UK economy.
Best Wishes for 2017 from all at AMA Research! 

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