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  Grim Mood Within Industry
Mixed messages have come from the construction sector recently, with activity unexpectedly growing in September but confidence falling. The general consensus seems to be that the recent recovery has been short-lived and harder times are ahead.

Despite increasing activity in September, employment in construction fell at its fastest rate for six months, registering its third consecutive monthly fall. House building activity fell sharply in the month, following twelve months of sustained growth, with the Chartered Institute of Purchasing and Supply's Markit activity index showing 45.4. This is its lowest level since July 2009, with anything below 50 indicating a contraction, and followed figures of 51.1 in August and 57.0 in July. In contrast, commercial property and civil engineering both experienced growth, although this is not expected to last.

The same Markit index for the construction industry overall was 53.8, up from 52.1 in August and still indicating growth for the seventh month in a row. However, it was well down from the average of 58 in the second quarter and shows a weakening trend. More worrying is the future business activity index, which indicates the expectations for future growth a year from now. This fell from 59.9 to 54.2 in a month, the lowest value for the last 21 months, and is largely put down to fears over the impending public sector cuts.

Growth in construction sector orders slowed for the fourth consecutive month in September, putting in the poorest performance for seven months. This all added to the general gloom and lack of confidence in the sector.

Bleak Outlook for SME's...

The latest State of Trade Survey from the Federation of Master Builders, the UK construction industry's largest trade association, painted a particularly gloomy picture of small and medium-sized enterprises (SMEs) in the sector. The survey showed that 42% of those companies said their public sector new build workload had fallen and 51% expected a further fall in the next three months. Only 9% were expecting things to improve.

This is a particularly difficult time for SMEs working on public sector contracts, with the Building Schools for the Future project severely curtailed and further cuts in capital spending to follow. After three consecutive years of declining conditions in the SME construction sector, there are now real fears of a double dip recession here even if this prospect is being downplayed generally. It does call into question the ability of this particular part of the private sector to make up for any slack in public sector activity.

Insolvency firm Begbies Traynor's latest Red Flag Alert report for the third quarter of 2010 showed fewer construction companies at risk but a decline in the rate of improvement. The number of construction companies that were experiencing either 'critical' or 'significant' financial difficulties fell from 17,033 in the second quarter to 15,894 in the third quarter. However, this 7% improvement compared with figures that were 26% better in the second quarter compared to the previous one.

For property companies, 12,595 were in trouble in the second quarter compared to 12,097 three months later. Again, however, the rate of improvement declined from 23% to 4%, reflecting a significant fall in the rate.

Grim Up North...

North of the border, around 42,000 construction jobs went between 2008 and 2009, with a further 8,000 jobs dependent on the industry also lost. Output over the period was estimated to be down £1.7 billion. There are now fears that cuts in the capital budget could result in a further 50,000 Scottish construction jobs going, one quarter of the workforce. Each percentage point cut in capital investment is reckoned to cost 1,200 jobs.

The situation in Northern Ireland is no better, with 21,000 construction jobs lost in the last 2.5 years. It's now feared that a possible £2 billion reduction in the capital budget over the next four years could lead to the loss of over 30,000 jobs by the end of 2011.

Overall, the business services and construction sectors are expected to bear the brunt of public sector cuts. Accountant PricewaterhouseCoopers predicted a 5% fall in construction output due to public sector building projects being scrapped. This alone could amount to 100,000 jobs.

As ever, it's not all doom and gloom. The Olympic Delivery Authority announced that more than 10,000 construction jobs have been created as a result of preparations for the 2012 Olympics. The Olympic Park is employing 6,243 construction workers while a further 4,090 are working on the athletes' village. The London Crossrail project is also cranking up to speed and will employ around 14,000 construction workers during 2013-2015.


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