IMPACTS ON CONSTRUCTION
This weaker economic outlook has obvious implications for the construction industry, particularly for the private sectors.
Construction activity had already stagnated in the first half of the year and the quarter-on-quarter outturn for the second
quarter was slightly negative.
Our Dublin forecasts, based on the premise of no change in the UKs relationship with the EU, assumed a better second half of 2016 than the first once EU referendum uncertainties were out of the way. However, we now expect a worse second half of 2016 with the industry experiencing a mild recession over the next two years. Some of this downgrade is related to the referendum and some is due to the weakness of some sectors in the first half of this year.
Interestingly in the new house building sectors, public housing output is faring worse than expected while private housing output is holding up. Given the particularly poor second quarter, when public housing output barely stayed above £1bn in 2013 prices, a double digit decline is almost inevitable for the year as a whole. The current political environment remains unconducive for any pick up in the sector over the forecast period, although there have been increasing calls, even from some on the government back benches, for more funding for genuinely affordable housing.
Our prognosis for private housing has not changed substantively from that put forward in the summer, despite the initial post-referendum panic from investors. We have halved the growth rate for next year on the basis of weaker economic performance but the underlying driver of the sector, lack of supply compared with latent demand, has not changed, thus the projection is still for growth over the forecast period.
Infrastructure output is likely to contract more sharply this year than anticipated and this is believed to be due to a hiatus in road building and a weak performance in the electricity sub-sector for the first time in many years. While there could be some slippage in timing for some of the major projects in the pipeline we do not foresee any significant cancellations over the forecast period. In fact, the government may boost capital spending to mitigate the impact of the referendum vote. Hopefully, the position will become clearer with the Autumn Statement in late November.
The sector we believe is most vulnerable to the impact of the referendum vote is the private commercial one, with its heavy reliance on overseas investors in the London market. The capitals office development cycle had probably already peaked, thus the referendum result is likely to sharpen the downturn. However, the regional markets are somewhat more insulated from this effect and given a shortage of Grade A space in many, the prospects for new build remain good.