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Crisis? What crisis?

The question of whether the British construction market is heading for a recession is an academic one for many civil engineering firms.

While other sectors of the industry have boomed - noticeably commercial, industrial and private house building - the civils sector has been suffering a post Jubilee Line Extension hangover.

Ever since heavy construction work on the JLE peaked toward the end of 1996, civil engineering output has fallen for four consecutive quarters, only experiencing a small rise in the first three months of this year (see Chart 1).

But those hoping that this signals the end of the slump should take note of the order figures, which continue to drop more regularly than President Clinton's pants.

Of course, scaling down of the JLE work is not the only reason that the infrastructure sector is having a nightmare. As Chart 2 shows, orders for road building are less than half what they were three years ago. The 'other' category - dominated by rail work - continues to drift downward and only the water and sewerage sector - pushed forward by regulatory pressure - continues to provide increased workload.

But anyone combing through the job pages of NCE each week knows that the market has felt far healthier than the infrastructure output figures would suggest.

The truth is, of course, that individual civil engineers and the firms that employ them have been very successful at branching out into other construction sectors. The great leap forward came in the 1980s - as total construction output exploded 34% in the five years between 1986 and 1990. There was some rationalisation in the early 1990s, but, for all the pain, output levels at the bottom of the slump were still far higher than those recorded in the 1970s and early 80s. From mid-1995 onwards, order levels for all new construction work turned the corner and, as Chart 3 demonstrates have been rising ever since. Output joined the party around three to six months later.

The two leading industry forecasters - Construction Forecasting & Research and the Building Materials Producers - see little reason why this trend will not continue.

New construction output rose by 3.4% in 1997, the biggest rise this decade. BMP bullishly predicts an increase of 3% this year, 3.5% next and 3% in 2000. CFR is more cautious overall, suggesting that new work output will jump 3.5% in 1998, drop 0.5% in 1999 and start the new millennium by rising 1.3%. Taking the two forecasts as extremes, new construction output will rise between 4% and 10% (an average of between 1.3% and 3.3% per annum) over the next three years. Chart 4 shows an average of the two forecasts.

Chart 5 demonstrates the logic behind future growth predictions, again using an average of the two forecasts. Continuing to provide the main impetus behind sustained growth is the massive commercial sector.

There are a number of buoyant niche markets in this area; one is provided by Lottery projects, another by the privately financed hospital programme. The commercial sector is the one most closely pegged to consumer expenditure and this is predicted to grow - albeit at a slower rate - for at least the next three years. Real personal disposal income is set for a 5.8% increase between now and 2000, while consumer spending is likely to grow by over 7%.

However, the slow down in the rate of growth, and the office market finally reaching saturation, will eventually undermine growth in the sector towards the turn of the millennium.

It is at this point that the forecasters believe the infrastructure sector is due to take over. In a rare moment of agreement, both CFR and BMP predict a 5% increase in output during 2000 as the Channel Tunnel Rail Link and Railtrack's West Coast Main Line upgrade get going.

Underlying many forecasters' assumptions, and not just those working in construction, is the view that the economy can achieve what Gordon Brown says it can - slow, steady growth.

The Chancellor is trying to avoid a boom and bust economy by instructing the Bank of England to keep inflation within strictly defined boundaries and attempting to keep public spending under control.

So far he, and his Tory predecessors, appear to have done a relatively decent job. The macro-economy came out of recession in 1993 and economic growth has averaged a very sustainable 2.9% since then. Construction, after the horrors of the 1990s slump, took longer to recover and has only averaged growth of 0.7% in the same period.

Gross domestic product is forecast to grow by 2.3% next year, 1.75% in 1999 and 2% in 2000. Given that construction output has been underperforming GDP growth for most of the nineties, after out-performing it for most of the 1980s, it seems likely that CFR's predictions of growth around 4% for the period would seem to be the best bet.

But it is growth none the less, not recession.

Chart 6 shows that, given proper management of the economy, construction can look forward to the longest period of sustainable growth since the early 1970s. Yes, the growth rate is nothing to that seen in the 1980s, but that was clearly unsustainable and resulted in what was - as output dropped 12% - a hugely damaging slump.

The slow rate of growth will mean civil engineering firms having to keep a very close eye on how they address the market.

Cost and resource control will remain as important as they did in the recession, with any over-spend always likely to wipe out slim profit margins. With core markets growing only slowly, the most active firms will look to diversification to fuel expansion. Despite the well-publicised economic troubles in South East Asia, targeting of the most attractive overseas markets will continue to become an even greater priority.

For all these reasons the next few years may 'feel' like a recession, even if technically the statistics show that the economy is growing.

The nearest comparison to the current economic situation is that experienced in the early 1970s. There, construction output collapsed by over 16% in four years as the oil crisis sparked off a recession.

The biggest danger to steady growth this time could also come from an external economic emergency - and the full implications of the Asian currency crisis are not yet fully understood. The current collapse of the Soviet economy and projected problems in South America are unlikely to have a significant impact on the GDP of developed nations - which do most of their trading with each other. However, it

will do little for confidence - something clear from the collapse in share prices around the world.

The output figures used in this piece are for the UK only, and many larger firms, particularly among the consultants, have a significant reliance on overseas earnings. The impact on these firms of a slowing in international growth could mean them suffering out of proportion to those relying solely on UK work. It could also mean increased competition in the UK market.

Mervyn King, deputy governor of the Bank of England, puts the chances of a recession in the macro-economy - defined as two consecutive quarters of falling output - as 8-1. If he is right, then GDP/construction output trends suggest that the chances of a construction recession is, at a guess, 6-1 - perhaps 4-1 given that King's prediction was made before things started going pear-shaped in Russia.

This is a nervous time for economists and the economy. We are so used to a boom/bust cycle that there is a feeling that if we are not buying Porsches and guzzling champagne, we must be worrying about negative equity and shopping at Mr Buyrite.

It may take years for us to get used to the idea that we can maintain a happy medium - and, of course, we may not maintain it.

Even if we do achieve slow, steady growth over the next few years, we will continue to hear talk of recession - but the odds are still against it.

Alastair McLellan

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