Thursday 25 October 2012

Much ado about nothing but construction

There’s always something slightly old fashioned about Office for National Statistics (ONS) media events and this morning’s press conference to announce the preliminary estimate of Q3 GDP was no exception. Avuncular chief economist Joe Grice delivered the news that the economy had grown by 1% between Q2 and Q3 – marking a statistical departure from the double-dip recession – with the air of a country solicitor telling assembled eager beneficiaries of a will that it’s a little too soon to be precise about the size of the bequest.

Mr Grice said that the latest growth estimate will have been affected, positively and negatively, by the impact on the economy of the Queen’s Diamond Jubilee bank holiday, unusually poor midsummer weather and the Olympic and Paralympic games. But just how big these effects are wasn’t yet clear, although the sales of tickets to the two sporting extravaganzas was reckoned to have added 0.2% to GDP in Q3.

However, what the sober statisticians did highlight was that even with the largest quarterly surge in output since before the start of the financial crisis in 2007 the economy was no bigger in Q3 than a year before and only 0.6% bigger than Q3 2010. The economy has thus been through three quarters of decline and one quarter of growth which roughly balance out. Given the furore that accompanies these GDP snapshots, good and bad, this could be a case of much ado about nothing. Yet that can’t be said about one particular sector, construction, which may hold the key to explaining why the economy has flat-lined over the past year.

Q3 was much better for both the production and service sectors which grew by 1.1% and 1.3% respectively (the latter, intriguingly, boosted most by output in the ‘government and other services’ sub-sector). But construction sector output contracted by 2.5% in the quarter, following a big contraction in previous quarters. While all such figures are subject to revision, these preliminary estimates suggest that the construction sector is producing 10.8% less than a year ago and a whopping 17% less than before the recession.

Why is this economically significant as well as important for construction firms and workers? Because construction is not only suffering very badly, in terms of jobs and pay as well as output,  but is also the one major part of private sector activity that is clearly being adversely hit by fiscal austerity.

The Chancellor may argue that broader economic forces, rather than cuts in public spending and investment, are the reason for our current woes. But the plight of the construction sector suggests otherwise. Mr Osborne may outline his own ideas for boosting infrastructure spending, and thus demand for construction projects, in the forthcoming autumn statement. However, the longer he waits the fewer the excuses he will have if the relatively good economic news in Q3 isn’t repeated well into next year.            


  1. Could you explain the specific link between fiscal austerity and construction? I get that declines in government investment have been particularly severe and some of this would impact demand for construction (fewer hospitals, schools etc built). But what about household and firms' demand for construction (home building, remodels, office and retail building). Is this impacted by fiscal austerity? Shouldn't it be high in a low interest rate environment?

    1. Thanks

      The problem with household demand at the moment is not so much low interest rates as availability of credit - mortgage lending is very restricted. Business spending on construction is meanwhile held back by the same lack of confidence that is limiting investment overall. In such an environment there is a strong case for government to borrow at low interest rates and invest itself, the opposite of what the government is doing by cutting back

  2. Do you see or expect to see any disproportionate effect in construction vs other household/ firm demand for investment/ capital goods (cars, durables, manufacturing equipment, IT etc)? What's quite striking about these numbers is how sensitive construction seems to be to national income.