Public sector cuts finally start to bite, UK

Public sector cuts finally start to bite, UK
Published: 08 August 2011

The latest Construction Trade Survey published today, shows that the cuts to public spending, announced by the government last autumn, have finally started to impact on construction activity, confirming the fears the industry has warned about for some time.

Whilst these latest indicators reflect the scale of government retrenchment in the public sector, anaemic economic growth, a beleaguered consumer sector and the continuing reluctance of financial institutions to increase their exposure to the built environment, are all restricting the private sector recovery.

Commenting on the survey, Noble Francis, Economics Director at the Construction Products Association said: ‘Construction activity fell in most sectors during the second quarter, with only a small rise in private commercial activity preventing even sharper falls. The greatest falls were seen in public non-housing such as education and health and with the public sector spending cuts already taking effect this will only exacerbate the situation.  Furthermore, at a time when tender prices and profitability remain under extreme pressure, persistently high materials price inflation is making operating conditions extremely challenging for firms operating throughout the construction industry.

Some manufacturers during Q2 benefited from Sterling’s attractiveness relative to both the euro and dollar and increased their export sales, resulting in an additional 18 per cent of manufacturers turning to overseas markets compared with the previous three months. This has been a welcome bounce back from the poor conditions experienced during the winter months, but there remains a great deal of concern regarding the year ahead given that we have not yet seen the full impact of the public sector cuts and the Association forecasts that construction output will fall in 2011 and 2012. The government has stated that construction is at the heart of its growth strategy for the UK economy and, as it accounts for around 10% of the UK’s economy, it is vital that investment in essential schools, hospitals and housing is maintained at levels that will provide the basis for economic recovery.’

Speaking about the survey Stephen Ratcliffe, Director UKCG, said: ‘Market conditions remain tough.  Government has not just cut back on capital investment.  It is also reviewing many programmes (such as school building) and is devolving responsibility to local decision makers.  Hence, the picture on forward public investment remains pretty murky.  Clarifying this is the single most important step government could take to help the industry ride out these tough times.’

Julia Evans, Chief Executive of the National Federation of Builders added: ‘It is still of great concern to members of the National Federation of Builders that lending to construction continues to fall, dampening the prospects of a private sector-led recovery. Construction experienced the highest rate of insolvencies of any industry in the second quarter, a sure sign that weak demand, extremely competitive pricing and rising costs are all having a destructive effect on the industry which will continue to be felt for years to come.’

Key survey finds are:
• product manufacturers benefited from growth in overseas sales in 2011 Q2 and 22% of heavy side and 34% of light side manufacturers expect sales growth to exceed 5% during the next 12 months. Elsewhere in the industry the outlook is subdued.
• 37% of building contractors, on balance, reported activity contracted between 2010 Q2 and 2011 Q2.
• Public non-housing work reduced according to 50% of contractors, on balance, during the year.
• SME builders reported that workload declined for the 14th consecutive quarter, according to 19% of firms, on balance.
•  77% of contractors and over 90% of product manufacturers, on balance, suffered higher materials costs YoY in 2Q11.