Election uncertainty more concerning than GDP figures

Simon Rawlinson
05 May 2015

Twitter FacebookLinkedIn

Print

Topics 

Business

With the election still too close to call and the major parties both in denial over the reality of a future coalition government, the long–term implications of uncertainty, expediency and pork barrel politics are far more of a concern to the industry than mystifying output data, says Simon Rawlinson.

As the election campaign reaches its climax, disappointing GDP data published at the end of last week threatened to derail the coalition’s hard-won reputation for economic competence.  Early readings of GDP are notoriously subject to revision long after publication, mainly because the sample of services data is so thin.  Disappointing construction output and a moribund manufacturing sector set the tone for a disappointing set of results.  However, is the data pointing in the right direction and should we be looking forward rather than back?

According to latest data from the ONS, construction output was lower by -0.8% in the first quarter of 2015 than the same period last year.  An industry that cannot secure labour or materials to meet the demands of clients was shown by data to be technically in recession.  Clearly this doesn’t make sense.  Construction’s weak data contributed to a halving of the growth rate, offsetting growth in services and other aspects of the consumer economy.  What could have contributed to this counter-intuitive result? 

Firstly, output is difficult to measure at the best of times, and with the industry under massive strain due to the rate of growth seen over the past year, perhaps the sampling is not picking up all activity in the sector. 

Secondly, the volume of construction work varies a lot according to seasons and some of the dip measured by the ONS may be explained by a stronger than usual cyclical fall during the winter months. 

"According to latest data from the ONS, construction output was lower by -0.8% in the first quarter of 2015 than the same period last year.  An industry that cannot secure labour or materials to meet the demands of clients was shown by data to be technically in recession.  Clearly this doesn’t make sense."

Thirdly, much of the drop appears to be affecting repair and maintenance work, which grew strongly in 2014 – and which is easier for clients to switch on and off than new build work. 

Finally, as in so many sectors of the UK economy, the rapid growth seen in construction during 2014 may be tailing off a little – which is just as well as it was unsustainable in some markets.  In summary, the industry is likely to be in much better health than suggested by the ONS data.

Industry surveys and lead indicators such as the Purchasing Managers Indices all point in this direction.

Rather more worrying for construction are prospects after the election – particularly if the outcome is a weak or unstable government.  A reduction in new orders recorded at the end of 2014 may be an early sign of clients sitting on their hands – even if other forward indicators of workload such as the PMI are positive.   The industry and its clients clearly have confidence at the moment, but this confidence may prove to be very fragile in a hostile investment climate. 

The construction recovery has been underpinned by the sectors which rely on a long-term positive outlook, including house building, the commercial sector and infrastructure.  Given an inconclusive election outcome next week, this week’s unexpected GDP reading from the ONS could prove to be a precursor for a much more uncertain and challenging  period for Construction.

Simon Rawlinson is head of strategic research at EC Harris