The UK has a construction problem

Today brings us a whole raft of new data on the UK economy but before we get to that there has been some new analysis and indeed something of a confession. Let us start with @NobleFrancis who has crunched some numbers on the impact of the recent cold snap and snow in the UK.

In terms of construction work lost due to the bad weather between Wednesday and Friday last week, we estimate UK construction output has lost £1.6 billion (annual construction output in 2017 was £156.3 billion)……with the majority of new construction work postponed. External repair & maintenance (r&m) construction work was also postponed. r&m on internals of building could still be done but getting to site meant this was also hindered..

He is unconvinced that there will be a catch-up.

…theoretically it’s possible to ‘catch-up’ on work once the weather improves but in construction this rarely happens in practice.

This of course affects a sector which has been in recession since early summer last year and of course with the factor below might be an example of it never rains but it pours.

will also be adversely affected in 2018 Q1 by the liquidation of the UK’s second largest construction firm, Carillion, in January 2018.

The Markit PMI was showing something of a flat lining but it will have predated the worst of the cold weather. Also it seems to have missed this which is from this morning’s official release.

Construction output also decreased in the month-on-month series following growth in the final two months of 2017, contracting by 3.4% in January 2018.

As you can see Carillion had a big impact and added to what seems to have been weak construction output across much of Europe in January. This is the position compared to a year ago.

Compared with January 2017, construction output decreased by 3.9%, representing the biggest month-on-year decline since March 2013.

If this sector was a bank the UK establishment would be piling in like it was the US cavalry wouldn’t it?

On the other side of the coin we will have had a boost to GDP from the energy supply industry as the heating was turned up and it will be a quarter with the main Forties pipeline at full flow assuming there are no problems this month.

A confession of sorts

This came from the Bank of England in a working paper towards the end of last month. Remember the case I have made plenty of times on here that its QE bond buying inflated pension deficits which weakened the UK corporate sector and therefore was not the triumph it was claimed to be? Anyway after more than a few official denials we now have this.

Nor is this just a problem in the UK as low-interest rates have raised the value of pension liabilities around the world.

A sort of confession and attempted deflection all at once! We do however get some interesting detail on the scale of the issue which in spite of the way the sector has contracted is still substantial.

The 6000 DB pension schemes in the UK private sector are a significant source of retirement income, with around 11 million members and assets of around £1.5 trillion. The aggregate funding deficit that these schemes faced (on a Technical Provisions basis ) is estimated to have reached around £300 billion by 2015 , equivalent to more than 15% of annual GDP.

So how did things play out?

while firms with larger pension deficits had an incentive but not an obligation to act in
response to these deficits they paid lower dividends on average, but they did not invest less.

Okay so the first subtraction from the UK economy was lower dividend payments. Of course one of today’s themes Carillion and its economic impact was the opposite of this as it paid dividends rather than fixing its pension scheme. Moving on we get something which is even more damaging for QE supporters.

We show that obligations under recovery plans agreed with TPR prompted firms to adopt a different pattern of behaviour compared to their more voluntary
responses to deficits. Firms making contributions to close those deficits did reduce investment and
dividend payments on average. These effects were greater for firms that were financially constrained, reflecting the more limited options available to them to use external or other internal  funds to smooth out their expenditures. ( TPR = The Pensions Regulator ).

This had quite a big impact.

The scale of these effects was large for many FTSE 350
companies with DB deficits, and responses to them can explain some of the weakness in aggregate
dividends and investment observed since 2007.

This reinforces work first done by Toby Nangle and it is to his credit he was several years at least ahead in time. Oh and as the writers of the working paper have families to feed and one day might hope that the Bank of England tea and cake trolley might arrive again in the rather damp dungeon they have been posted to for further research there is this.

while the effects for some firms were large, by contrast the effects at the aggregate level
have been small in macroeconomic terms, and are dwarfed by the estimated positive impact of QE.
QE is estimated to have boosted the level of GDP by in the region of 1½-3% (Kapetanios et al,
2012; and Weale and Wieladek, 2016), while the negative effects of deficits are only estimated to
have reduced GDP by around 0.1% GDP since 2007.

I do like the way that one of the authors of the work about the GDP boost is the same Martin Weale who voted for it. We can imagine a paper from say Alan Pardew to the West Bromwich board stating that whilst they might be in a relegation crisis he has boosted their points haul by using counterfactual analysis. How do you think Baggies fans would treat the obvious moral hazard?

Production and Manufacturing

There was some expected good news here.

In January 2018, total production was estimated to have increased by 1.3% compared with December 2017; mining and quarrying provided the largest upward contribution, increasing by 23.5% due mainly to the re-opening of the Forties oil pipeline,

In it there was continued good news for manufacturing.

Since records began in February 1968, this sector has never recorded nine consecutive monthly growths……… ( Quarterly output was) manufacturing provided the largest upward contribution with an increase of 2.6% ( on a year ago).

Yet it was also true the monthly increase was only 0.1% and in something of a contradiction was driven by ( sorry).

Growth this month within manufacturing was due mainly to a rise of 1.9% in transport equipment. Within this sub-sector motor vehicles, trailers and semi-trailers rose by 3.2%

That is not as mad as it may seem as UK engine production has been very healthy. Also the erratic pharmaceuticals sector had a bad quarter (-7.8%) so on its past record it should rebound.

Trade

Tucked away in the numbers there was a hint of some better news. This of course has to be taken in the context of years and sadly decades of deficits but there was this.

Comparing the three months to January 2018 with the same period in 2017, the UK total trade (goods and services) deficit widened by £0.4 billion.

Which if we allow for the £2.2 billion increase in oil imports and fall in oil exports should show an improvement. Exports have also had a good year.

Although total (goods and services) exports increased by 5.6% (£8.4 billion)

We of course need a lot more of that.

Comment

If we step back and look at the overall position the UK economy continues to bumble its way forwards.We have seen a good run of manufacturing production which means that output is now only 0.3% below its pre credit crunch peak. However the fact it is still below after so much time shows the scale of the damage inflicted. Industrial production is also in a better phase.

On the trade issue there are flickers of improvement but we have a long journey to travel to end the stream of deficits. As to construction it seems to have hit something of a nuclear winter and as government policy has been involved in the creation of this via the impact of Carillion you might think it would be paying more attention, especially as other companies have not dissimilar weaknesses. If this was the banking sector the money would be pouring in. Also are we not supposed to be in the middle of a house building surge?

 

 

 

 

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12 thoughts on “The UK has a construction problem

  1. 3.9% is a hefty fall even for something as volatile as construction and allowing for the Carillion effect.
    Worth noting as well that LSL Acadata index has Jan 18 with it’s house price index recording it’s first annual negative….0.4% ….in a long time.
    Separate new HPI index LCP Acadata which includes cash sales and more… is recording a minus 4.7% for Q4 2017.

    Interesting times

    • Hi Dutch

      Yes it is a substantial fall and we can expect another fall in February unless of course the cold weather effect arrives in the March data. Whilst the weather in London is becoming more springlike the numbers from the construction & housing sector remain in winter mode.

  2. Shaun, I like your emphasis on construction. If only filling potholes could be called construction. Two nights this week I saw multiple cars hauled up on the verge, they had run consequetively over the holes and were immobile with broken wheels! A pothole documentary on TV last night had the authorities claiming we had the safest roads in the world but they neglected to include the cyclists killed and maimed because of potholes, these aren’t RTAs apparently.

    Anyway back to construction. I tried to acces the fab Govt initiative this week called https://homebuildingfund.campaign.gov.uk/

    I am to build 2x innovative offsite electric homes. It turns out that this fund is only open to “small” builders who have plots and plans to build 5 or more units. I politely suggest that if you can afford a plot for 5 or more then you are in the “club” of land bankers already! An example of fake help I think , probably coerced by Wimpey etal.

    So there you are not much going on in Construction than decrepitude, muddy wintery sites and BS in Britain really.

    Paul C.

    • Hi Paul C

      One never knows the full truth but I noted a post on Twitter stating that they had fallen off their (push)bike due to falling in a pothole. When the ambulance turned up they said they had no trouble finding the spot as they had picked someone up there in similar circumstances only a week before.

      I am sorry to read about you being turned down. It has been a long running theme of mine that all this sort of help is directed at larger companies because that is essentially what Japan did. As Snoopy so famously says “When, when, when, will I ever learn”?

  3. The ONS construction data is toilet and has been for about a decade. A total waste of time that represents nothing in the real world. If the work Carillion were doing was picked up by smaller firms the ONS doesn’t survey it wouldn’t even show.

    I can still remember the Q2 2010 numbers showing a huge boost, subequently revised. Things have got even worse since then. I’m surprised they’ve got the guts to still bother publishing it.

    The ONS GDP and trade data are both essentially worthless. The ONS was destoyed by moving it to Newport and losing 90%+ off staff in one go. it doesn’t look like there’s any hope for accurate data anytime soon.

    • Hi David

      I agree that there have been plenty of problems with the construction data. The two I can clearly remember is the deflator one ( can they measure inflation accurately anywhere?) and the swerve where a large company was switched from services to construction and as the song goes “Hey,hey,hey it’s magic”

      But sadly for this sector there is not much else to go on.

  4. Those struggling to save a deposit to buy a house in the UK face the same problem as those in Ireland just after the crash in 2006, they saw prices finally start to fall after having gone up every year for over ten years, tripling, quadrupling or even quintupling in price. Their time had come surely?, the nightmare was over, but no, the ECB and their own government conspired to prevent further falls in prices, and around 2013/4 prices bottomed. Rents bottomed around 2010 in Dublin and have since risen 81%, and are 19% higher now than they were at the peak of the bubble.

    What this means to people trying to buy is that it now costs around 1700-2000 euros to rent a three bed semi in Dublin,a semi renting for 2050pm would cost around 1650 to buy,if mortgage rates went up 2% they would cost the same. Rental properties are now so short that agents don’t even bother to advertise them anymore, renters are trapped as by paying such high rents means they can never save enough to put a deposit down, this problem is already affecting the UK market, and every drop in house prices is counteracted by the government and the Bank of England, ensuring the current generation of renters can never buy, it would appear that even if house prices stall at current levels, rents will continue going up.

    There are so many things wrong with this market it is hard to know where to begin considering the number of distortions that have built up over the decades – buy to let landlords, QE, zero interest rates, mortgage interest tax relief, Funding for Lending, first time buyers assistance, governments altering policies to favour the housing market prior to general elections, planning laws and regulations, green belt restrictions on building, the selling off of council houses(Right to Buyscheme),stamp duty.

    That probably isn’t all of them, but unless there is a massive financial reset worldwide that bursts all bubbles and results in the collapse of western currencies, leads to double digit interest rates and overrides the attempts by this and future goverments to prevent falls in prices, property in the UK will remain a protected asset, underwritten by HM Government andTreasury and the Bank of England.

    Not what renters want to hear, but the government, the banks and the electorate that already own do not want prices to drop, so sorry, you are screwed.

    • Hi Kevin

      Let me respond with the construction data from Ireland. This goes as follows.

      “On an annual basis, the volume of output in building and construction increased by 16.3% in the fourth quarter of 2017 when compared with the fourth quarter of 2016”

      Looks even better when the volume index is 151.9 where 2010=100. Until you look back and note that the peak was 358.6 in the final quarter of 2006. Suddenly if you throw in some perspective solid growth is in fact a long way short of ending the ongoing depression

  5. Unemployment is low and has been for some time. Where then are all the unemployed construction workers? I assume they are lying low in the cracks somewhere; so there is some capability for catch-up.

  6. Only anecdotal, but living and working in West Berkshire and Oxfordshire, I cannot imagine how you could build more houses than are already on the go. Every town, every village and, of course, Oxford itself, seems to have a new housing development. In some cases, such as Didcot or Wantage, they are on a gargantuan scale.
    Is this a regional thing?

    • They are probably building houses for London commuters, who cannot afford to live in London, and cannot afford to leave their job either, so they are likely to be expensive 3,4,5 or six bed, executive properties -yes?, there is a lot less profit for builders to build the type of house first time buyers want, so they just cater for detached houses, in large developments, they have to include a proportion of “affordable housing” – an oxymoron if ever I heard one -otherwise they don’t get planning permission.

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