Heating and Ventilating

 

Construction outlook bright as growth predicted

The Chancellor's Autumn Statement which has sought to build confidence in the wake of the Eurozone crisis has been greeted with mixed reviews.
Construction outlook bright as growth predicted
The Autumn Statement is set against the backdrop of higher than expected inflation, driven by a sharp increase in global commodity prices which the Office for Budget Responsibility (OBR) considers to be the main reason the economy has grown more slowly than expected since the June Budget 2010.

Impacting upon this has been the effect of the Eurozone crisis which has increased instability and uncertainty leading to household and corporate belt-tightening. These factors together with the fall-out from the 2008-09 financial crisis has impacted upon medium-term growth prospects, resulting in the OBR significantly revising down its projected rate of growth by a margin consistent with previous financial crises.

However, there is good news for the housing market - often seen as a barometer for the wider construction industry - as activity is expected to surge in 2013 after a stagnant few years. According to forecasts this will include a 20 per cent rise in transactions in 2013-14 compared with the previous year.

The OBR also said that house prices would rise at levels above inflation from the same year, reaching annual growth of 4.5 per cent in 2015-16. It was predicted that transactions would fall by 3 per cent in 2011-12, grow by 1.5 per cent the following year, but then surge by 20.7 per cent in 2013-14.

Survey company Glenigan is positive about the forecast. It says the Government appears to have recognised that investment in construction projects can deliver sustained economic growth. The National Infrastructure Plan, which accompanied the Autumn Statement, identifies more than 500 infrastructure projects the Government wants to see built over the next decade and beyond.

Glenigan also identifies that the Government has re-allocated funds to capital projects that will feed directly into local economies across the country and will improve the UK's capacity for longer term growth. In addition, the Government is looking for a far greater contribution from the private sector to deliver capital projects. Bridging this finance gap will be crucial to the strategy's success. A number of the Government initiatives covered in the Chancellor's Statement will take time to bear fruit: The Green Deal is due to start next autumn, while the Housing Strategy and securing pension fund investment in the UK's infrastructure will however take longer to filter through to work on site.

Near term, support for construction and the wider economy will come from the delivery of planned public sector capital projects. Here progress to date has been mixed. A number of planned projects have been delayed or cancelled. The Government's response has been to bring forward additional projects, yet overall public sector gross investment will still be lower over the Spending Review than previously planned.

Economic Summary

GDP growth forecasts for this year and next have been downgraded, reflecting weak household consumption and the impact of the Eurozone crisis on business confidence. In addition, government gross investment and expenditure are set to be lower than predicted in March.

OBR Economic Forecast

The OBR not only downgraded its forecast for GDP growth over 2011 to 0.9 per cent, but drastically cut its growth prediction for next year. Highlighting the growing output gap in response to European turbulence and high inflation, it now expects the economy to grow by 0.7 per cent over 2012, down from the 2.5 per cent set out in March.

One key prediction from the OBR is that high inflation and poor earnings growth will mean that real wages will be falling in the UK until 2013. This will severely limit economic growth and will constrain housing market over the next two years. After the 0.9 per cent drop in house prices over this year, the OBR predict a further 0.2 per cent fall over 2012. While the Government has announced plans to support the house market, it is unlikely to fully find its feet until households begin to see rising real earnings once more.

Significantly for the construction industry, public sector gross investment (PSGI) will be lower over each of the next four years than previously anticipated. Over 2011-12, PSGI will be £50.2bn, a 6.6 per cent drop on what was set out in the March Budget. This is expected to fall to £47.9bn in the next financial year, and will fall each subsequent year until 2016-17 (see table).

Overall, the Government is now expected to invest £16.2bn gross less over between 2011-12 and 2015-16 than was originally set out in this year's Budget.

Additional measures

Increased support for energy-intensive manufacturing will include:
- The climate change levy discount on electricity for climate change agreement participants available from 1 April, 2013 will be increased to 90 per cent.
- Up to £100m over the Spending Review period to mitigate the impacts of the carbon price floor on electricity costs to businesses that are electricity intensive and operate in internationally competitive markets from April 2013.
- Compensation of up to £110m over the Spending Review period for the indirect impacts of the EU Emissions Trading System on electricity costs from January 2013.

Enterprise Zones

100 per cent enhanced capital allowances will be made available in the Black Country, Humber, Liverpool, North Eastern, Sheffield and Tees Valley Enterprise Zones. Additional Enterprise Zones are planned for Lancashire and the Humber and Battersea (linked to the redevelopment of the power station) while the existing North East Enterprise Zone will be expanded to support the renewables industry around the Port of Blyth.

Investment

• An additional £6.3bn of infrastructure spending over the Spending Review period, (£1.3bn of which was announced earlier in the autumn). This includes:
- National road network - investing over 1bn to improve the network and tackle areas of congestion
- Local Transport - £170m of extra funding to allow more local projects to go ahead.
- Telecommunications - investing £100m to create 'super-connected' cities across the UK, with 80-100 megabits per second broadband and city-wide high-speed mobile connectivity
- Regional Growth Fund increased the by £1bn
- Building New Schools - The extra £600m to build 100 new free schools to deal with the mini-baby boom of the early 2000s will help replace the work lost through the end of Building Schools for the Future (BSF). This initiative has been welcomed by the Royal Institution of Chartered Surveyors (RICS) as it will not only provide business for members, but the Institution says it will also improve the delivery of frontline services for all.

• Utilities - Government to guarantee £1bn of new private sector investment by regulated industries.

• National Infrastructure Plan includes Government commitment to £5bn of capital projects during next Spending Review period.

• Working with UK pension funds to unlock an additional 20bn for investment in UK infrastructure.

• The Chancellor reiterated the range of measures for boosting housing investment set out in its Housing Strategy last week.

Non-fiscal Measures:

• Planning reform - a new presumption in favour of sustainable development will be introduced so that the default answer is 'yes'. Major infrastructure will be fast-tracked. Planning applications will be streamlined and will have a 12-month guarantee for application processing.

Enterprise Zones will fund 21 new zones in areas with the greatest need and potential. These will include Enterprise Zones in Birmingham and Solihull; Leeds City Region; Sheffield City Region; Liverpool City Region; Greater Manchester; West of England; Tees Valley; North Eastern; the Black Country; and Derby, Derbyshire, Nottingham and Nottinghamshire. In additional London will have an Enterprise Zone to be chosen by the Mayor. Ten more zones will be announced in the summer after a competitive process. Policy tools available in the Zones include a 100 per cent business rate discount worth up to 275,000 over five years and simplified planning.

• The rate of Stamp Duty Land Tax on bulk purchases of residential property will be on the mean value of the dwellings involved rather than the overall value of the transaction. This is intended to encourage large scale investment in the private rented sector.

• The Government is to consult on simplifying the creation of Real Estate Investment Trusts and making them more accessible to investors in order to encourage investment in the private rented sector over the longer term.

• From autumn 2011, the Government will publish a rolling two-year forward programme of infrastructure and construction projects where public funding has been agreed.

First-time buyers will no longer receive an exemption from stamp duty from March 2012 as the government says the relief is 'ineffective'.

The statement from RICS identifies that a central assumption of the forecasts include a predicted GDP growth of just 0.7 per cent which will result in unemployment rising in 2012 to its highest level since the mid-1990s, which will threaten the real estate sector.

The statement said: 'There are of course no easy fixes to what are deep structural problems in the economy but for all the talk about infrastructure being a key part of the plan for growth the total amount of new funding in the area for the forthcoming financial year is a meagre £760m. There was little money to play with in truth but if the government was going to be true to its word we could have expected to see a greater shift of resource into this area from current spending. The pre-announced strategy of encouraging pension funds to invest into infrastructure should, if successful, pay dividends in the medium term but will provide little immediate relief for the construction sector.'

RICS has also set out concerns about the growth estimates from the OBR. While clearly plausible, it says that the Government is 'taking a good deal on trust'. Business investment may rebound more strongly and the trade balance improve as exports into Europe gather pace but the risks to this profile look to be skewed to the downside. One consequence of this approach is that greater weight will be placed on the Bank of England to do more. With inflation set to fall sharply over the next year, at least one more round of quantitative easing looks highly probable.

Referring to priority infrastructure schemes, RICS says that a focus on delivering high priority key regional infrastructure projects will help drive economic growth in these areas and contribute to narrowing the growing North/South divide which will help UK Plc as a whole. When choosing projects to prioritise, Government must take an evidence based approach to appraising return on investment to capture the real economic benefits to the immediate and wider area. This will ensure that the optimum returns are delivered for the taxpayer and private investor.

To view the full statement click here.

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1 December 2011

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