Construction comes to terms with a flat market

THE BUILDING industry, which employs around 18 per cent of the workforce, harbours some of the most painful memories from the last recession, with mass layoffs across the whole sector.

While the construction industry is not expecting a recession in the true sense, it is anticipating a slowing down in the rate of growth of recent years, especially in interest-rate-sensitive, large-scale property developments.

The building industry is one of the most sensitive to cyclical downturns, but the effects take longer to kick in - and therefore to show up on the statistics - because of the elongated timescales involved in designing and constructing projects from start to finish.

According to government statistics, the total volume of construction output in the first quarter of 1998 was 2.5 per cent higher than the previous quarter. On paper this looks like a substantial rise in activity, but in reality it reflects the rapid growth that started in 1995 when the industry emerged from the last recession

A more telling statistic is output, which expanded in the second quarter of 1998 at a rate of 9 per cent compared to 19 per cent in the first three months of the year. According to these numbers, the slowdown in the industry looks more significant.

Examined regionally, it seems London and the South-east have peaked in terms of market expansion, whereas other regions, such as the South- west, are dipping considerably.

But things are far from being what they were when the last recession kicked in, and construction is being cushioned by fund and development activity from the mid-90s that is still feeding into the industry today.

US groups and other investment vehicles are also helping to fuel British building by buying property companies and investing in projects in the UK and the rest of Europe.

The slowdown in property development projects is also being counterbalanced by an expected increase in public sector building, particularly in education, health care, transport, infrastructure and research.

At present, private sector work still provides more work than projects generated by the public purse.

One likely consequence of a reduced market will be an increase in mergers and acquisitions, either by companies swallowing up competitors or turning themselves into one-stop-shops for all property and construction work.

The industry still faces acute labour shortages owing to disenchantment in the sector following the last recession.

There is also a major shortage of graduates entering the profession because of the boom-and-bust nature of the business

Alan Berrill is head of construction services at Fuller Peiser.