Construction industry may not fully recover until 2016 at the earliest, expert predicts

Infrastructure expert Graham Robinson of Pinsent Masons, the law firm behind Out-Law.com, said that it may even be "wishful thinking" for construction output to return to the levels recorded in 2007 by 2016 due to the prospect of "worsening" economic stability in Europe.

Robinson was commenting after a recent survey indicated a continuing downturn in trading conditions for construction firms during August, with "business confidence" in the industry at its lowest in nearly a year following a decline in the number of new contracts.

He said the results of the survey by financial information firm Markit and the Chartered Institute of Purchasing (CIPS) were in keeping with recent construction output data published by the Office for National Statistics and that it was also representative of what he had seen "on the ground".

 "Spending on infrastructure, a sector the coalition government has been keen to stimulate, has actually fallen by 24.8% since a year ago," Robinson said. "The lack of funding for UK infrastructure and the lack of appetite from UK pension funds to funding new infrastructure is a key reason for this decline."

"The recent fall off in new housing and commercial construction in the UK is a major concern, as we do not expect the construction sector to return to levels seen in 2007 until beyond 2016, and even that assumes the worst is behind us in terms of a potential Greek exit from the Euro, or further destabilisation of the Euro Zone," he added.

Traditionally, infrastructure in Europe has mainly been funded by governments. But, with the Euro Zone heavily indebted, there is little realistic prospect of increases in governments spending on infrastructure, as this could potentially worsen public debt, Robinson said.

There has been a move by the European Commission to implement Project Bonds to pay for new infrastructure. The Commission has identified that Europe needs €1.5 to €2 trillion worth of new infrastructure across Europe.

The new Solvency II legislation potentially means that banks and insurance companies will need to hold higher amounts of capital to offset lower investment grade infrastructure. Robinson said.

"The economic downturn is worsening in Europe and this is likely to lead to a further deep downturn in the Euro Zone. The indebtedness of Europe and the inability to fund large-scale infrastructure programmes is likely to continue because where there is no money in the public purse governments cannot spend on infrastructure to change the situation. Solutions through private financing initiatives and project bonds have been initiated but with the latter it could be a while before the construction sector sees any benefits," Robinson said.

"However, Scotland seems to have bucked the trend of decline in infrastructure investment due to the success of the models adopted by the Scottish Futures Trust," he added.

The Markit/CIPS survey showed "solid reduction" in the workloads of civil engineering construction firms, with a decline also reported in "commercial construction activity" for the first time in two and a half years. However, the worst performing area of the industry was the residential building sector, according to the data gathered from purchasing executives at 170 construction companies.

Companies across the construction industry reported a "marked fall in new work," according to the survey information.

"August data pointed to a renewed downturn in UK construction output and another reduction in new order volumes, highlighting an ongoing deterioration in business conditions across the sector," Markit/CIPS said in a statement.

Construction companies reported that their employment levels had "stagnated" in August and that "increased concerns" about future business prospects had "weighed" on their decisions about whether to hire new staff.

Business confidence in the construction industry is as low as it has been since October 2011 and "reflected lower new order intakes and concern about a lack of work to replace completed projects," according to the Markit/CIPS report. A decline in purchasing decline was also reported for the third consecutive month as a result of the reduced workloads construction companies have, it said.

Suppliers are taking longer to complete processes that they have been asked to undertake, whilst construction firms also "widely reported" that they had suffered delays in receiving materials from suppliers because those firms had low levels of stock, according to Markit/CIPS.

David Noble, chief executive of CIPS, said that "tough times still lie ahead" for those in the construction industry.

"This is dire news for the construction sector which saw its fastest drop in new orders for over three years," he said. "Undoubtedly the Government will come under more pressure to help the sector and implement Sir Adrian Montague’s proposals to kick-start house building, when it responds later this year."

"Both the decline in commercial activity and the significant drop in new orders are particularly worrying. The commercial sector had previously been propping up the figures and the lack of new contracts suggests things will get worse before they get better," Noble added.

Tim Moore, senior economist at Markit, said that a "rather implausible double-digit growth surge in each of the final two quarters" was required if construction output for 2012 was to match the level recorded in 2011. He said, though, that the "survey evidence" suggests that the downturn may not yet had reached its worst.