The rapid expansion in construction activity over recent years was as unsustainable over the longer term as any other economic bubble. But while output has slowed, the outlook now is for a gradual return to trend rates of growth rather than for a dramatic downturn.

Annual growth in output by the UK construction industry began to slow sharply in the second half of 2004 and this turned into a year-on-year decline in the first half of this year, according to government figures.

Official estimates of output in the first six months of 2005 reveal a fall of almost 1% compared with the same time last year. The first-half weakness was most pronounced in new building work, with output down over 2%, whereas repair and maintenance output rose by a modest 0.6% year-on-year.

Annual output fell in most categories of new work. Although the private housing sector bucked the trend with an increase of 5.5%, public housing output dropped by 6%. In commercial construction, the largest sector of new building and a reflection of the importance of services in the British economy, output fell by around 1%. Infrastructure work fell by 13% in the year to the first half of 2005 after declining significantly in both 2003 and 2004.

Employment levels

Employment in the industry, including the self-employed, rose by 8% in the year to April 2005, to a level well in excess of the late-1980s boom, which suggests that labour productivity fell sharply during the last year.

But construction companies remain upbeat, according to the September survey of purchasing managers. The index of future business activity registered 75.8, as respondents’ optimism was buoyed by a widely anticipated increase in demand in the coming year.

&#8220It is quite possible that the games could crowd out other elements of construction, either in London or elsewhere”

Evidence of renewed life in the housing market is provided by the Council of Mortgage Lenders, which reports a 9% rise in borrowing in August, underpinned by a 6% increase in new lending for house buying. The number of loans for house purchases rose to 101,000 in August from 96,000 in July, suggesting that the recent cut in interest rates helped dispel pessimism among homebuyers. Only a small majority of estate agents now expects prices to fall over the coming months, because demand for homes has risen without a corresponding increase in the number of properties for sale.

Orders for new work which entered the pipeline in the three months to July 2005 were 9% higher in volume than in the same period a year earlier, according to official figures. There were increases in all areas except the commercial sector where order volumes dropped by 22%.

Orders for new private housing jumped by 25% between the three months to July and a year earlier. Orders in the much smaller public housing sector rose by 32%.

Looking further ahead, Oxford Economic Forecasting expects growth in private housing output to slow in 2005 and in 2006, but to avoid an annual fall so long as a major slump in house prices is avoided. No significant increase in commercial or industrial construction is forecast over the medium term but further growth in public housing is expected.

Infrastructure work

The outlook for infrastructure work is made uncertain by London’s successful Olympic bid. The capital cost of the games is put at £8.5bn, but much of this will be spent on improvements to the rail and road infrastructure, which will produce only a relatively limited increase in demand for wood and wood products. And OEF warns that with the expected capacity constraints “it is quite possible that the games could crowd out other elements of construction, either in London or elsewhere”.

Official estimates of demand for UK-made builders’ carpentry and joinery indicates a yearly fall of almost 10% in the three months to July, while output of kitchen furniture was 10% up on the same period last year. A new forecast by Market and Business Development indicates that demand for timber and timber-related building products will rise by 7% in real terms between 2004-2009, to reach £3.45bn in 2009.