17th April 2018
Cautious optimism for construction as we move into Q2
It can be confusing getting one’s head around official construction statistics in the UK. One month there are severe declines in output then several months later the data is revised to show growth rather than contraction. The media pick up on the first headline and so the narrative is set. However, the nature of construction statistics collection, taken through a monthly business survey, means that many respondents do not return their forms within the deadline. Therefore the initial estimates of monthly construction output can have as low as 40% response rate. It is then always necessary to treat the initial estimates with a large degree of caution. Analysing the historical revisions to data over the past five years shows an average upward revision to the initial estimate of monthly growth of around 0.9 percentage points. So any slight contraction in the monthly figures is always worth treating with scepticism.
The latest ONS figures show that the construction industry declined by 1.6% in February compared to January and this follows on from a 3.1% decline in January. Therefore, given the pattern of recent revisions, it is safe to conclude that the industry has declined in the first two months of this year. It is likely that the construction industry will thus prove a drag on the GDP figures for the first quarter of the year when those figures are revealed later this month. This is exacerbated by the weaker sentiment data for both manufacturing and the services sector suggesting that overall economic growth will slow. Over the last few years, the UK economy has underperformed in the first quarter with growth of 0.3% in Q1 2017, 0.2% in Q1 2016 and 0.3% in 2015 Q1. It will not be surprising if the growth figures for Q1 2018 are similar, or perhaps even lower.
Looking ahead the outlook for the UK economy is not without its challenges in 2018. The first quarter is looking weak but this has been the case in the last few years. The economy has proved resilient as the year has progressed in recent times so there is a cause for optimism in that fact. However, the UK was also the only G7 economy that saw a decline in its growth rate in 2017 so the momentum is easing. Construction is unlikely to positively impact the overall picture in Q1 and needs a pick-up in commercial activity to improve its performance. With such uncertainty surrounding the UK economy at the moment, there will be big challenges ahead in 2018.