Market review: Crawling along

Macroeconomic signals have been mixed over the past month and the economy had the slowest rate of growth of any G7 economy in Q1. Michael Dall discusses the highlights of Barbour ABI’s monthly Economic & Construction Market Review

Economic context

The macroeconomic signals have been mixed over the past month with the purchasing managers’ index (PMI) indicators suggesting a slowing in the dominant service sector, as well as manufacturing, but a better performance in construction.

Based on the current figure of 54.5, analyst IHS Markit estimates the economy will grow by 0.4% in the second quarter, following growth of 0.2% in Q1. IHS Markit reports that businesses remain “cautiously optimistic” about the economy’s future growth prospects.

Comparing the UK economic performance with the other major economies in the G7 shows that it had the slowest growth in the first quarter of 2017. After recently being one of the top performing countries in the group, this shows how the UK economy has slowed at the start of this year compared to comparative economies. A decline in consumer spending has hit the UK hard at the beginning of the year, meaning UK GDP was 0.2% compared with 0.5% in the Eurozone and 0.9% in Canada.

This slowdown in consumer spending is potentially driven by the first fall in real wages since 2014, which fell by 1.5% in April, the latest statistics available. If this trend continues, this period of higher inflation and shrinking wages could prove a consistent dampener on economic growth.

Other news this month on the UK economy includes:

The latest figures from the Office for National Statistics (ONS) indicate the construction sector in the UK shrank by 1.6% between March and April 2017. The industry was also 0.6% lower than it was in April 2016.

The main reason for the monthly decrease in output is decline in the private housing sector. The sector shrank by 1.6% over the period

The main reason for the monthly decrease in output is decline in the private housing sector. The sector shrank by 1.6% over the period and public housing also declined by 7.9%. Over the longer term, new private housing was 1.4% lower in April 2017 compared to April 2016 (see Construction activity by sector, opposite). Identifying whether this is a decline that is indicative of an overall slowdown remains to be seen but it is worth remembering that the timing of Easter and the early May bank holiday may have had an impact on activity in the month.

The CPA/Barbour ABI Index, which measures the level of contracts awarded using January 2010 as its base month, recorded a reading of 143 for April. This is an increase from the previous month and continues to support the view that overall activity in the industry remains healthy (see Contracts awarded, opposite). The readings for private housing were up over the month, but commercial offices were lower than last month’s level at 115. Commercial retail increased considerably this month and the reading for industrial factories was significantly higher in April. This indicates that the pipeline of work in the private sector remains strong.

Construction sector

According to Barbour ABI data on all contract activity, May witnessed another decrease in construction levels, with the value of new contracts awarded at £4.9bn, based on a three-month rolling average. This is a 10.3% decrease from April and a 19.3% decrease on the value recorded in May 2016. The number of construction projects within the UK in May increased by 17.7% on April, but were 4.8% lower than May 2016.

Projects by region

The leading region for contracts awarded in May by value was in the South-west, accounting for 18% of the UK total. This was followed by the South-east, with 12% of contract award value (see Locations of contracts awarded, opposite). The highest value contract awarded in the South-west in May was the start of the Hinkley Point nuclear plant construction.

The mechanical and electrical works package was awarded to Balfour Beatty and NG Bailey, with a value of £460m. In the South-east, the highest value contract awarded was the University of Sussex Life Sciences Building, which was valued at £70m and awarded to McLaren Construction.

Types of project

Residential had the highest proportion of contracts awarded by value in May, with 34% of the total. The West Campus development at the University of Hull was the largest residential contract awarded in May, at an estimated value of £130m.

Another large residential contract was a 380-apartment development in Salford valued at £60m, awarded to Domis Construction. Infrastructure secured the second highest share of contracts by type, with 26% of the value awarded. The Blyth Offshore Wind Farm was the second highest value contract awarded in May. Situated in Northumberland, the contract had a value of £300m with the base foundations being constructed by Bam Nuttall.

Construction performance by sector

Spotlight on commercial & retail

Contract values in the commercial and retail sector were lower in May, continuing the trend from the second half of 2016.

The value of contracts awarded in the commercial and retail sector was £521m in May based on a three-month rolling average. This is a 16.8% decrease from April and a 40.6% decrease from the May 2016 figure. In the three months to May, the value of contracts was 3.4% below the previous three months but 26.5% lower than the same period in 2016, indicating a subdued environment.

London was the main location of activity in the sector this month, accounting for 25.5% of the value of all contracts awarded, which was lower than its 50.6% share in May 2016. The largest contract awarded in London in May was the commercially led Stone Studios in Hackney Wick. This is a £19m contract which combines circa 5,000m2 of commercial development with residential units.

The South-east also attracted a high proportion of commercial contracts this month, with 17.1% of the value of contracts occurring in the region in May, a significant increase from its 2.7% share in May 2016.

Offices were the dominant type of project in the sector, accounting for 56% of the value of contracts awarded this month, which is 2% lower than its share in May 2016. General retailing is the next largest sector, with 31% of contract award value – an increase from its 18% share in May 2016.

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