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Construction output 9% below 2002 levels

Upcoming public sector cuts will mean the private sector will have to grow by £333million just to maintain current output, according to new research

The findings published in a major new report by Designing Buildings Wiki point to an increasingly bleak future facing the UK construction sector as cuts to local and central government start to bite.

Public sector output has increased 12 per cent since 2002 while in the same period the private sector shrank 15 per cent. This meant by 2011 UK construction output was 5 per cent above where it had been a decade earlier.

However from the start of 2012 both sectors fell creating a risk of a double dip recession should private sector growth fail to compensate public sector shrinkage, according to the report.

Designing Buildings Wiki chair David Trench said: ‘Until the beginning of this year, the construction industry had held up pretty well, supported by increases in public spending.

But in the last three quarters, public spending has dropped, and if the current trend continues we are headed for a perfect storm. Our analysis shows that to make up for public sector cuts, the private sector will have to increase output by more than a third of a billion every quarter just to maintain the current level of total output.

‘The phenomenal level of private sector growth required to actually bring about a recovery could only be achieved through a clear, combined Government/industry investment policy, and it needs to happen now.’

The level of planning permissions is currently 30 per cent below the same period in 2004 suggesting a poor outlook for future growth, the report argues.

Furthermore, the most recent RIBA Future Trends survey indicated the majority of UK architects predict no immediate improvement in their workload.

Respondents also predicted they would maintain current staffing levels but there was little sign of imminent growth in recruitment.

Commenting on the survey, RIBA director of practice, Adrian Dobson said: ‘RIBA members continue to report intense fee competition and a lack of project financing.

‘The situation clearly remains very patchy with some practices describing conditions to be extremely challenging whilst others report full order books.’

Public sector housing and infrastructure were both on the retreat while private sector housing was witnessing a ‘patchy and slow recovery’ it claimed – claimed the report. Employment in the sector was roughly equivalent to 2002 standing.

Trench added: ‘The construction industry accounts for around 8% of GDP and is the fundamental lynch pin in getting the UK out of recession. The full effects of the Government’s austerity plans are yet to be seen and our analysis shows that once they do, total output levels could fall off a cliff if the private sector does not pick up.

‘The Government is beginning to introduce policies that could help, such as re-assessing planning obligations for stalled projects, the introduction of the

infrastructure investment guarantee fund and the funding for lending scheme, but it could be too little too late with the UK not reaping the rewards until at least 2013.

‘The success of the London Olympics has shown us that the UK construction industry has the ability to lead the world but the Government needs to continue

this momentum by encouraging financial institutions to lend. We need to facilitate growth in the private sector and unless the whole industry is content with

crossing its fingers and hoping for the best, the time for action is now.’

 

The report set out five key ‘solutions’ to the sector’s problems:

1. Re-introduce tax relief on mortgages. This would instantly encourage house builders to dust off their mothballed schemes to meet the surge in demand and affordability.

2. Re-introduce a selective employment tax giving tax breaks for employees engaged in manufacturing. This would help redress the balance between manufacturing and service industries and act as a catalyst for construction companies to seek out ways of prefabricating assemblies off

site in factories. Inevitably this will lead to regions hard hit by the downturn capturing contracts for sites that might be hundreds of miles away.

3. Re-introduce stock relief allowances. This would encourage continuity of supplies instead of the current stop/go ‘just in time’

4. Avoid focusing on new grand projects. Instead kick start those projects that have been placed on hold, that have planning consent and that have a completed design. These are the projects where funding dried up following the banking crisis. A National Development Agency staffed by highly qualified individuals should examine such schemes and assess economic viability prior to the government standing as guarantor to a reputable funding institution.

5. Re-introduce capital allowances. Ernst & Young calculate that UK corporations are sitting on a staggering £750 billion, around half the UK’s GDP. These companies prefer to use the cash to reduce debt, rather than take it on. To get things moving and release this cash the government should re-introduce generous capital allowances not only for plant, machinery and stock but for refurbishment of premises. Refurbishment requires short lead in times and seldom involves planning consent. It is fast turnover with labour peaking much more quickly than for new developments.

 

Read the full report

 

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