How the construction sector is impeding the recovery

Growth declined by 0.7 per cent from April to June, a much bigger drop than expected by most economists.

Combined with negative growth in the last three months of 2011 and the first quarter of 2012, the economy has been going backwards for nine months now – shrinking rather than expanding.

Of the 0.7 per cent fall, 0.4 per cent was attributable to the construction sector, which makes up 8 per cent of the economy.

Construction – infrastructure projects and building – saw a 5.2 per cent fall in output from April to June, following a 4.9 per cent drop in the previous three months.

‘Damage’

Alan Clarke, an economist at Scotiabank, said bluntly: “It looks like construction has done a lot of the damage.”

So what has gone wrong? Is this the result of too few homes being built, as desperate would-be buyers are turned away by mortgage lenders demanding unrealistically big deposits? That is a small part of the problem.

Bear in mind that construction covers a wide range of building projects – from public and private sector housing, to schools, hospitals, roads, bridges and other big infrastructure schemes. Figures compiled by the Construction Industry Training Board – Construction Skills (CITB) – show there will be a 25 per cent fall in the number of public sector homes built in 2012, compared with a 5 per cent rise in private housing. But other public sector building, such as schools and hospitals, will decline even further – by 30 per cent.

This will not improve in 2013, with an expected 10 per cent fall in public sector housing and a 13 per cent decline in other public sector building. Infrastructure projects, such as Crossrail and HS2, should rise by a modest 1 per cent in 2012 and 5 per cent in 2013.

‘Immediate help’

Mark Farrar, from the CITB, said the fall in growth showed “how urgent it is for action to be taken to protect UK construction’s future”.

He said construction had “the ability to transform the financial fortunes of the whole country” and boost employment, but that the “industry needs immediate help and that help is needed now”. The CITB is predicting that there will be 75,690 fewer jobs in the construction sector by 2013 because of the state of the economy. It talks about “a lost decade in construction”, sparked by cuts in public sector spending.

A spokesman for the Home Builders’ Federation (HBF), whose members construct 80 per cent of private homes in England and Wales every year, told Channel 4 News: “We are currently building just over 100,000 homes a year in England, but we should be building 240,000.”

Permission for 36,761 new homes was granted in the first three months of this year, but the HBF estimates that 60,000 are needed every quarter based on the government’s household projections.

So what is the government doing to boost activity in the construction sector and the wider economy?

Chancellor George Osborne told Channel 4 News on Wednesday that the government’s strategy rested on “dealing with the deficit and making sure that Britain can live within its means”.

Government critics argue that a looser fiscal policy – spending more and cutting less – would boost growth, but Mr Osborne believes that taking his foot off the austerity pedal would mean higher borrowing costs for Britain at a time it can ill-afford this.

Action

In recent weeks, the government has announced schemes to boost lending to businesses and households and encourage new infrastructure projects – without spending money in a direct way that would affect the national accounts.

Under “funding for lending”, which is expected to be worth around £80bn, banks will be offered cut-price loans as long as they use this money to lend to businesses and individuals.

The HBF has welcomed the scheme, saying it should boost demand for new homes, increase building and create thousands of jobs – as long as mortgage lenders make finance available.

The government will also offer guarantees on £40bn of private sector loans to major infrastructure projects and direct loans to public-private partnership projects worth an estimated £6bn.

Risks to the taxpayer are minimised by the insistence that infrastructure projects – transport, utilities, communications and energy – meet a strict set of criteria.

Mark Farrar, from the CITB, said investment in infrastructure would drive long-term growth, but action was also needed now.

“It is also vital that money is invested in housing, repair and maintenance and other areas of construction now – as the best route to job creation in local areas and impacting the economy in the short term.”