Forecasting, as any estimator will tell you, is a mug's game. Get it right and people think you got lucky, get it wrong and it's your judgement that's to blame. Economic forecasting is a particularly thankless task, especially when dealing with a sector as volatile as construction.
In NCE's 15 October edition, the headline above our lead story declared: 'Construction defies economic gloom'. Construction Forecasting & Research had increased its predictions for economic growth in the construction industry by 0.9% to 6.4% over the three years between 1998-2000.
CFR was not alone in feeling optimistic despite the South East Asian crisis and a general feeling of economic malaise stealing over the UK. Many pointed to the fundamental strength of the British economy, which would continue to provide a steady, if not spectacular, stream of income for the construction sector. National Council Building Materials Producers economist Alan Wilen declared there would only be a marginal decrease in its summer forecasts come December. ICE economist Owen Simon labelled talk of a deep recession as 'tosh'.
Then, in the 22 October issue, NCE exclusively revealed that Railtrack was not spending its much touted capital works budget. A week later, NCE reported that BAA had halted work on the £1.8bn Heathrow Terminal 5. In December the paltry number of road starts announced by Transport minister Lord Whitty surprised even industry pessimists. Questions about the feasibility of the West Coast Main Line upgrade (NCE 10/31 December) are also starting to emerge.
With the civil engineering sector shot to pieces, forecasters turned their attention to building, where weakening consumer demand was hitting client confidence with a vengeance.
In the 1970s and 1980s, the thought of inflation being tamed was treated as a kind of economic holy grail. Such is the pervading economic gloom that, now it seems likely to happen, commentators talk of it as a harbinger of a '1930s style depression'.
The result of all this doomsaying has led construction's main forecasters - the BMP and CFR - to finally replace the brave face with the hair shirt.
The latest BMP forecast and the expected direction of the CFR predictions due out next week make worrying reading.
Taking the two forecasts together, output expectations for 1998 (the true picture will not be known for about three months) and 1999 have been slashed in half when compared with the predictions made in the summer (see table). A 2% increase is still predicted for 2000, but this of course is from a much lower base. Altogether output in 2000 is now expected to be 2.7% lower than it was in summer. If that doesn't sound much, it accounts for about £1.5bn that the industry won't now be seeing.
Of course forecasts for 2000 are more unreliable than those for 1999, given that there is more time for the unexpected to happen. Forecasts also tend to magnify their own trends. As we go into the downward swing of construction's cycle, the forecasts are becoming more and more pessimistic.
Although infrastructure output is still on its way down, orders appear to be on the climb (Chart 1). Unfortunately the size of the rise is 'a blip' created by the letting of the first orders for the Channel Tunnel Rail Link.
Rail work is included in the 'other' category of the Government's infrastructure statistics and the impact of the CTRL contracts can be clearly seen in the last quarter (Chart 2). The water sector remains buoyant, while the roads spend continues to plumb new depths.
The CTRL contracts have come too late to boost 1998 output, although they do help add a little heat to this year's workload.
However, lower investment in major client sectors, such as gas and communications (cable TV and mobile phones), slowing demand from the water sector as companies meet EU and regulatory targets, and a moribund roads market have undermined what could have been a healthy period for civils, especially in 2000, following two years of decline. Output is likely to grow, but is unlikely to produce the boom predicted six months ago.
Other new work
Non-housing new construction accounts for about 40% of the total market. Relatively little repair and maintenance work (as defined by the Government) is structural. For this reason 'new work' contains the sectors of most interest to civil engineers - infrastructure, as well as commercial, industrial and public sector (non-housing) building.
It is the commercial sector that has driven the late 1990s boom (as it drove the one in the late 1980s). Such is its size (15% of the total market) it can influence the industry like no other (Chart 3).
Commercial output has been feeding through at a slower rate than expected during 1998. For most of the year, it was assumed that the workload was being 'pushed forward' into 1999. But with 1998 output 4% lower than predicted in the summer, this year's output forecast has not been increased beyond the 7.5% rise suggested in the summer. The market was always expected to slow in 2000, but now, no growth at all is expected.
There was little debate that industrial building was in for a rough ride as the manufacturing sector cut back on its investment. That decline has been accelerated in the latest forecasts - down another 4% at 13% over the next two years.
The one bright spot is public sector building. In the summer doubts over the Government's commitment to the Private Finance Initiative, urban development and local government funding, had led forecasters to predict a 2.5% fall in output during 1998 and a minuscule 0.5% increase over 1999/2000.
Instead, the signing of a rash of PFI hospital deals has spearheaded impressive growth in the sector, with output predicted to climb 4% in 1998 and a further 8% in 1999/2000.
The big picture
Chart 4 shows most clearly how growth is expected to flatten out during 1999. It also demonstrates that the forecasters believe - with some reason - that clients will increasingly favour patch and repair over the greater capital outlay needed for new work.