Thursday, 28 April 2011

Is building work plummeting?

Dry statistics they may be, but do the latest figures for economic growth, or GDP, point to a desperate time for small traders who depend on building work?

I've heard some people trying to argue away the significance of the 5% drop in construction activity in the first three months of 2011.

One line is that measuring construction is a dicey business and the statisticians often get it wrong. Another is that the effect of the freezing weather in December spilled over into company turnover reported in January and February.

But there is an alternative scenario, which could reinforce concern about the outlook for the economy this year.

The chief executive of the Construction Industry Council, Graham Watts, told me yesterday that there had been a slowing down in public sector construction work, in schools, in hospitals and social housing. No surprise there.

But he added: "Another major factor is the increase in VAT, because adding 2.5% to a £50,000 house extension is obviously a great deal of money, enough to have deterred people from going ahead with that kind of work."

Having asked around, it appears that there could be more to this point than meets the eye, around London anyway. I'd be interested in what readers have to say about other areas.

What I hear is that inquiries about building extensions, kitchens and suchlike have fallen off a cliff this year, after a very healthy few months last summer and autumn.

Here are some possible reasons:

1. The VAT hike in January.

2. The prospect of interest rates rising and hence mortgage costs.

3. The squeeze on living costs from inflation, cuts in income and higher tax.

4. Worry about public spending cuts.

If you are anxious about your spending power or your job then it makes sense to put off building work, or to cancel it altogether.

It has been suggested to me that half of all construction activity is at the smaller end of the business: repairs, maintenance and domestic building projects. So if that's taken a knock, there would be a significant impact on the overall figure.

I checked this with the ONS (Office for National Statistics) and, sure enough, they said that large businesses with 100 or more employees account for only 43% of construction output.

Very small businesses, with 4 or fewer staff, produce 17% of construction output. In number they are 81% of construction businesses.

I wonder whether a building blight is spreading across the UK?

If it is, the consequences could be pretty uncomfortable in a few months time. A small trader could keep a workshop open until the summer, perhaps, and keep a few helpers employed.

But the pressure to shut up shop and conserve cash will grow.

I hope events don't unfold this way. It wouldn't look like a healthy recovery.

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