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Green Shoots Emerging for Construction

Tentative signs are emerging that the flow of new construction projects is steadying after the sharp declines seen since the middle of last year. A rise in the number of construction projects starting on site in May 2009 trimmed the year on year fall in the Glenigan Index to a 25 per cent year on year decline, compared to falls of 35 and 30 per cent year in March and April 2009 respectively.

Early leading indicators are even more encouraging. Construction projects going out to tender averaged 38 per day in May 2009 compared with a February 2009 low of 30 projects per day. This is a 27 per cent increase on the back of a sharp fall over the previous 18 months. The majority of the new work has been smaller public sector projects and jobs associated to major Government projects. While a high number of small projects indicate that conditions are still challenging, Glenigan forecasts that the value of underlying construction project starts during the second half of 2009 will be little changed on a year earlier. This is much lower than two years ago, but encouraging after an estimated 24 per cent year on year fall during the first six months of 2009.

Planning applications in May 2009 were 32 per cent above the low point reached in February 2009. Planning applications in May 2009 were however a third lower than a year ago, so while the trend is positive, the construction industry still has harsh trading conditions to battle with.

Planning applications for household and small private housing projects were much improved. This coincided with a modest recovery in mortgage approvals. Whilst housing market conditions are forecast to remain harsh during the second half of 2009, the rise in planning applications suggests that the initial turmoil from the credit crunch as the banks tightened their lending criteria has begun to ease. Nevertheless market activity is still extremely weak and over the coming months developers will remain focussed on building out and selling existing projects rather than opening up new sites.

More encouragingly, the number of social housing construction projects starting on site increased in May. This suggests that the promised Government funding is starting to filter through and is providing some relief from the continued weakness in private housing construction project starts.

Allan Wilen, Glenigan economics director said “A rise in the number of construction projects starting on site in May 2009 limited the year on year drop in the Glenigan Index to 25 per cent. In March and April 2009 the Glenigan Index showed 35 and 30 per cent year on year declines respectively.”

Despite this, there has been a widespread fall in construction project starts across the UK during the three months to May compared to a year ago, with only Wales bucking the trend with a modest improvement. The sharpest falls have been in the West Midlands, North East England and London. In addition the recent decline in construction starts in Northern Ireland has continued to gather momentum, with project starts running at half that of a year ago.

Construction project starts in the education and community & amenity sectors increased during May 2009, providing further evidence that additional Government funding is starting to accelerate planned projects. This is much needed relief from the comparative picture in the industrial, office and retail sectors where the value of underlying starts is less than half that compared to a year ago. The strong start to 2009 in the civil engineering sector dipped in May due to a scarcity of water industry construction projects.

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