16 April 2012
There’s very often a paradoxical upside to bad news, as I’m sure the Taoists among us will readily accept.
It will be disturbing news if the next set of stats show that measured construction output collapsed in the first quarter of this year.
But, weird as it may seem, that might just provide a fillip for real action to support an industry that gets more political attention than it does sensible assistance.
Let’s start the story from the growing media attention being paid to the next set of GDP figures. The big question seems to be: “Is Britain or is Britain not back in recession?”
The rather rough-and-ready but much-publicised preliminary GDP figures will provide an official verdict later this month.
Statistically that may be interesting. In reality, on its own, GDP (and particularly the preliminary estimate) is a rather crude measure of how well the economy and the nation are doing.But that will provide no comfort for George Osborne if the words “Britain once again plunges into recession” are splattered throughout the media.
What may be comforting the Chancellor at the moment is that the consensus seems to be that we narrowly avoided a further reduction in GDP in the first quarter of this year after the 0.3% drop in the final quarter of last year.
Today for instance the respected Ernst & Young Item Club reckoned the nation will narrowly (very narrowly) avoid a double-dip recession.
But I have a growing feeling that consensus may start to shift.
A drop in recorded construction output in the first quarter of this year will not surprise those who follow the industry closely. But it may surprise more general economists who tend to look at business surveys for a steer on the direction of construction. Some surveys have been rather positive recently.
Earlier this month, the much-respected National Institute of Economic and Social Research (pdf) suggested output will grow 0.1% in the first quarter.
Its GDP analysis neatly breaks down the sectors and if we pull the estimate apart we see the construction output index penned in as 96.8 for the first quarter of 2012. It stood at 96.8 in the final quarter of 2011 and at 94.3 in the first quarter of 2011.
On my calculations that means construction output for 2012 Q1 in volume terms needs to be about 2.6% more than output in 2011 Q1.
As discussed in the previous blog, the data released on Frday suggests there was less construction in the first two months of this year than during the same period a year ago, despite milder weather and February having a spare leap day this year.
There will be revisions. They will probably be upward. There are a host of other adjustments that will be made. But just to stay level with last year may prove a struggle for an industry that seems to be shrinking.
Even if the industry did produce the same output in the first quarter of this year as it did last year, the NIESR figures are overoptimistic, unless I have missed some cute nuance in the numbers.
Let’s assume we see a 2.6% drop in construction output in the first quarter. That would translate into something like a 0.2% reduction in total GDP, all other things being equal. That would, accepting the rest of the NIESR assessments, put the UK into a technical recession with GDP dropping by about 0.1% in 2012 Q1.
Now it is entirely possible that the official figure put on the likely fall in construction output in 2012 Q1 could be far more or possibly far less than the 2.6% suggested above.
If the fall is more this will clearly highlight the plight of an industry which most people in power seem to think is ticking along okay.
My hope is that the shock of construction driving the nation into recession may just spark a realisation that the industry could be turned into a solution rather than a problem.
It creates permanent wealth. It creates jobs. It can reduce environmental stress. It can stimulate parts of the economy that are weak. It can even make a profit for the taxpayer.
These sorts of ideas are much echoed by politicians, but sadly poorly understood by them.
Ask a construction economist at random what the government should do and the chances are that the reply will not be to focus on high-profile infrastructure work.
Spending on more mundane things like new homes or refurbishment of existing homes will come close to - if not top of - their suggestions.
These create most potential value and most jobs. Not that I or they would necessarily be against some more spending on spectacular infrastructure projects.
For me, as I have said many times before, using the quantitative easing mechanism to build new homes would be among the most impactful ways to get the economy going.
New homes are among the more easily traded assets that construction can produce. The case for new homes is well accepted. And there is significant spare capacity.
Still we will see on April 25th what the statisticians make of the data in front of them, whether construction output is thought to have plunged and what impact this might have had on the nation’s overall output.
Being an optimist and given that we are talking about pain in the past, as perverse as it may seem, I’m hoping the figures show one hell of a plunge in construction output.
Then, perhaps, some of the complacency among the policy makers may evaporate and the potential role that construction can play in a recovery will be better appreciated.
A word of caution
Before you get too excited about these figures here’s a word of caution. These statistics are based on surveys. They have errors. They are regularly revised. They are educated guesses based on reasonable assumptions, reasonably statistical treatments and what data can reasonably be collected.
So by definition they will, almost certainly, be wrong. The question is how wrong.
Before you dismiss the GDP data or the surveys that go into creating the published figures in favour of your preferred industry surveys remember that GDP is trying to measure an actual amount. That is a tough challenge.
Most trade surveys try to measure changes in the amount, most are based on sentiment and most are subject to huge methodological problems when there is rapid change in their particular market. This is particularly true in construction.
Frankly, if the preliminary estimate of GDP comes in at between 0.1% up or down on the previous quarter I’ll just conclude what I and many others suspect anyway that the economy is pretty much flat.
The more important point is what is changing within the overall mix of economic activity.