Limited optimism in UK construction market

UK sales of construction products continued to rise during the third quarter of 2010, according to the Ernst & Young and Construction Products Association (CPA) Construction Activity Barometer.

The Barometer showed a slight drop from the previous quarter, though it is said that a reading of 74 still suggested a healthy increase on last year. A figure of 50 on the Barometer represents no change, while a figure below 50 indicates a fall in sales.

The compilers of the Barometer point out that the buoyancy of the past six months was relative to the depressed state of the industry during 2009. At that point, private sector demand contracted at an unprecedented rate.

Noble Francis, economics director for the CPA, said that sales of both heavy side products and light side products were strong, relative to the third quarter of 2009.

He said the heavy side sales index stood at 79 for the second consecutive quarter, and that 71% of respondents reported that their sales had risen.

Mr Francis said, "Expectations about the future, however, were more subdued, particularly on the heavy side." He said that from a peak of 81 in this year's second quarter, the expected heavy side sales index fell to 50, suggesting that sales volumes were expected to plateau in the fourth quarter.

Respondents to the survey warned that recovery was unlikely to be sustained beyond 2010, and expressed concern about the UK government's Comprehensive Spending Review on October 20.

"The Emergency Budget confirmed that government capital expenditure will reduce by nearly 40% between 2009/10 and 2013/14," said Mr Noble. "The Association's latest forecast expects that, despite a slight rise in construction output this year, the contraction in capital expenditure will be sufficient to send the industry back into recession in 2011."

Dominic McAra, a director in Ernst & Young's Construction Products team, said, "Caution appears understandable given the announced government capital expenditure cuts, which are likely to hit this sector harder than most. The impact of the cold winters of the last two years is also likely to be front of mind as companies look to the final quarter of the year and to 2011."

He went on, "Many companies have managed to generate cash flows during the last two years despite lower profits, as a result of reduced capital expenditure and maximising working capital. At some point this may cease to be sustainable without a longer-term impact on business, but it may not be until beyond the winter period that there is confidence to invest."