The Strategist

UK Construction Sector Facing Deceleration in Growth

03/24/2015 - 18:11

House building output declined steeply indicating a slowdown in UK housing market.

UK Construction Sector Facing Deceleration in Growth
UK construction industry growth plunged surprisingly by 2.6 % in January 2015 as compared to its previous month, mainly due to sluggish house building output. The drop was the fastest since 2013 end and much below the projections of an increase of 1.2%. The signs are likely to persist in near term which in turn stimulated the fear that house prices could jump up, as property supplies are unable to keep its pace with demand.

Despite continuous efforts to shift focus of the economy towards manufacturing and business investments, it continue to remain largely dependent upon consumer spending as well as service sector in past few months. After witnessing deep recession, the construction sector that accounts for nearly 6% of the economy, has still not restored back to its pre-crisis levels. However, the sector expanded at a significant growth rate of 7.4% in 2014 thereby recording a robust expansion.

Moreover, the 2014 fourth quarter decline was mainly due to drastic quarterly drop of 6.3% in repair and maintenance output. This was led by cut down in expenditures by local authorities. Meanwhile, the new housing output also declined 0.2%, first ever fall since 2013 first quarter. However, the overall output stepped up for both the sub-sectors, commercial as well as infrastructure.

The key factors that played an active role in restraining the demand include weak mortgage lending and increased housing prices while the elements that hindered the supply are shortage of skilled workers and tight funding environment, which in turn limited the overall construction growth in January 2015. The construction output is currently at 3.1% a level much below previous year. The freezing housing market is likely to spread its impact over the activities across the industry. Moreover, there is a high risk that the construction output is likely to contract in the first quarter of 2015 which in turn will be a drag on UK’s GDP growth as it was in last quarter of 2014.
According to the latest survey on construction sector, it seems that construction activities are relatively healthy and the construction sector is expected to record sound output growth in near term. And, as we are coming closer to the general elections, there is high probability that the sector will experience a temporary set-back in new housing orders. High volume of pending infrastructure projects from the year 2014 could provide the much needed stimulus to the sector.

However, at the moment there is a considerable shortage of big infrastructure projects, representing a gap in that specific section of the sector. In addition, uncertain European economic scenario is dimming the business confidence and hence the short terms orders of the industry. Despite the negative outlook, the overall portrait of the construction sectors appears healthy. We expect that this slowdown will not be substantial enough to offset the upward trend of growth for the year 2015. Still, there are hopes that the construction and infrastructure expenditures are likely to rise in the latter half of the year.