Supply problems and apparent decline don’t spell disaster

The latest Office for National Statistics (ONS) figures for construction output show a fourth consecutive monthly fall, bringing the level of construction activity down by close to 4% since a mini peak in March.

The picture painted by the numbers suggests that while infrastructure and industrial work has stormed ahead, other work in the sector has continued to decline and is now running about three-quarters of the level in 2018. Perhaps more importantly, the numbers depict a rapid fall in housing work, both new build and repair, maintenance and improvement (RMI).

The level of activity suggested in the July figures indicates a double-digit drop in housing RMI and new work since March. Private sector work was hardest hit, with private new-build work down 17%. Even if you smooth out the March figure by averaging it over the month before and after, the drop in overall housing-related work still comes close 10%.

Those reading the newspapers and specialist press will have noted that these are being widely interpreted by any number of commentators and ‘expert’ voices as the result of shortages in the supply of labour and materials. The primary causes being listed by commentators are the disruption to the supply lines created by the pandemic with Brexit adding some extra pain – notably in labour markets where the repatriation of EU workers has diminished the stock of skilled workers, with current attention focused on the shortfall in HGV drivers. To these causes, commentators often add the ‘pingdemic’ as an added factor.

For those with more curious minds, and those looking at a variety of other data covering construction, this raises a few auxiliary questions. Is this really what is going on? How long might this last? Where do we end up and when? For the more forensic still, there is the question of whether the ‘official‘ figures truly reflect what is occurring within construction.

Importantly, within the industry there are those who like to ask these types of questions who are unsettled by the scale of the fall in output presented in the ONS figures. These are not self-obsessed conspiracy-theory types who listen too closely to echoes in their heads. They do not fall into the category of the self-interested who regularly and often unashamedly challenge any data that don’t fit with their commercial desires. No, these are experts with a better clue than most about the way the data are constructed and what they might mean.

So, it is probably worth a deeper look at the figures before taking the ‘off-the-shelf’ narratives being touted.

Chart 1 provides a bit of historical context. It plots the general shape of construction activity in Great Britain set against the economic backdrop provided by gross value added across all sectors. Having pulled itself out of a deep drop during the recession of 2008-2009 much faster than the general economy, construction since 2016 has broadly followed a similar path. That was up to the bounce back from the Covid crisis.

Much of construction has proved more resilient, particularly infrastructure. But the star performances came in the housing sector, notably RMI. Loaded with unspent earnings and impassioned by the pandemic to improve their immediate environments, many households lumped heavily into home improvement projects – some to add space, others to improve the outside space. Meanwhile private housebuilders enjoyed happy times selling newly built homes at higher prices than most, if any, had imagined possible when lockdown loomed.

However, with merchants shutting, manufacturers winding down production and international trade (on which construction relies quite heavily) disrupted during the initial lockdown, and elements of the supply chains dislocated, it was not long before shortages emerged within the material supply system. Add into this a big ship jamming the Suez Canal in the spring and rampant demand for construction materials and products globally – and supplying sites with materials was always going to be tough. Indeed, that is old news.

More recently, increasing numbers of firms have started to recognise the inevitable consequences. There are now too few HGV delivery drivers to move all the stuff around that is needed to keep the economy ticking over comfortably. This has been an issue in construction as elsewhere and a particular problem for merchants who are having to do multiple deliveries because putting packages of all materials together for one site is not so easy now there are multiple gaps in stocks. This is a problem across the world, but the UK has an added problem. It has relied heavily on a migrant workforce, much of which repatriated during the pandemic. The UK also added bundles of red tape to the process of shipping across the UK-EU borders. This inevitably makes the UK far less attractive for EU exporters overseas at a time of high demand.

All this has created a drag on the economy more widely and on the construction sector, where supplies of key materials – notably timber – are both in short supply and exhibiting extraordinarily high price inflation.

So, without doubt the combination of the pandemic and Brexit will have had a negative impact on construction. But before we ascribe all the travails of the past few months revealed in the official construction output figures to this peculiar cocktail of circumstances, it is worth examining other data.

There is a catalogue of data that covers construction. And as we browse it, there emerges a bit of a mismatch between the stories it is telling and those that are told by the ONS data. Yes, the Markit-CIPS survey does show heat draining from construction. But like the Bank of England agents’ data, the signal is that the industry is enjoying solid if not rampant growth.

The local builders’ organisation FMB shows a similar pattern. This is odd if private housing RMI work was in decline. That is bread and butter work for this sector of construction. And the RIBA’s own numbers point to high levels of activity. Clearly this is more future looking, but even so it paints a positive picture of construction, even if statistically architects sit in the services sector and not in construction. We could turn to the RICS’s latest survey and get similarly exciting positive portraits of construction.

And to add even more to the mystery, the Builders Merchant Building Index (BMBI) is standing at an all-time high if you look at the June 2021 figure. Ironically, perhaps, definitely disturbing, but the only product stream that appears to be performing poorly in June was renewables and water saving.

Few would, or should, dismiss the case that problems with materials supply and the supply or labour are constraining progress within construction. It is certainly an acute problem in the housing sector. The Home Builders Federation survey of constraints on construction ranks material availability high. That it ranks close to the perennial complaint over planning delays suggests the gravity with which this issue is taken among those that build homes.

So, what can be wrong with the ONS data? In fairness there may be nothing wrong. But the numbers deserve scrutiny. And for those that understand the mechanics of the data reasonably well, there are plenty of possible problems that might be at play.

The ONS is tasked, unlike others who produce surveys of construction, to come up with a level of activity, not just how activity has changed. That is a tough task at the best of times. But currently the job is a bit like taking a reading of sea level on a pontoon during a storm with a howling gale and turning tide.

The task is not made easier by the slipperiness implicit in defining what is or is not construction. It is more an art than a science, with the bizarrely fragmented elements in constant flux. Add to this the challenges of weighting the samples when the points of reference are disrupted. Payments and income are used in the measure. The industry has a rather flexible and unpredictable relationship with both.

Trying to find accurate ways to deflate cash values to constant volume measures of construction provides challenges at the best of times. We are possibly within some of the worst of times, with price rises erratic and fluctuating.

Those more statistically and economically minded may find it intriguing that the index for construction output mirrors that of the index for gross value added by the UK construction sector. The point here is that they are different measures and cover different areas. Construction output does not cover Northern Ireland. Meanwhile, it includes, for sensible reasons, the cost of materials put in place, which would not form part of gross value added. This is not to suggest a lack of care or concern within the ONS, it is recognition of the difficulty of getting an accurate reading of the level of construction within the economy.

This does not make the ONS construction output any less reliable than other industry measure produced by various bodies or information providers. It is the best we have. But it is not infallible and bends under strain. The figures should be treated, as should all data in construction, not as absolute but as a guide.

More importantly, what does it all mean? Well, the industry is struggling with challenges associated with labour and materials supplies. These are real and will continue for some time, until the pressure creating the shortages eases, or the magic of the market delivers more stock of what people want or suitable alternatives. Ultimately, they are transient.

The medium-term future of the industry seems reasonably settled and will be driven by the economics and political choices. If the nation again flirts with austerity as it did after 2010, then there may be tough times ahead. But, for now, the consensus forecasts for the economy overall look benign.

The key concern for construction now must be on the future and setting itself on the right path. The pandemic has turned an industry that was flagging as 2020 loomed into one that is recognised more widely (whether directly or indirectly) as fundamental to the welfare, prosperity and performance of the nation.

There are many factors that will shape construction in the years ahead, but three dominant forces have come to the fore more prominently during the pandemic. The ‘3Ds’ if you like – decarbonisation, digitalisation and demographic change.

In tackling these there is the potential to radically reshape the built environment for the better. The outcome however rests on clarifying a vision that holds the consensus, creating a coherent plan which as far as possible understands and exploits the fundamental relationships between these three forces.

This is a testing time for the industry. But compared with many sectors opportunities abound. The minds of the industry should perhaps be drawn more readily to preparing and planning for the longer-term future. Surely, this is a moment when the sector needs to capitalise on any benefits thrown up by the disruption of Covid-19 and make good on the desire to build back better.

If there is a lesson from the recent set of data, it is to look closer at figures and their foibles to build a better understanding of what they really mean. And, more importantly, to look beyond the immediacy of the numbers at the bigger challenges ahead.