Construction: Residential and nonresidential prospects

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Construction Residential and non-residential
prospects
Grant Colquhoun Oxford Economic Forecasting

• 27 November 2003
• Tel [phone]
• Email gcolquhoun_at_oef.co.uk

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Factors weighing on construction

• Weak growth in Triad economy and not just
  industry, but services too - 2001/2 weakest
  service sector growth for a decade
• Very subdued personal income growth
• High/rising unemployment in many countries
• Big squeeze on business profits and decline in
  business investment
• Pressure on government budgets in some countries
  (although not all)

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Low real interest rates the key

• Low real interest rates have driven up house
  prices at double digit rates (e.g. US, UK, Spain
  and France).
• Falling stock markets and low bond yields also
  made property investment more attractive both
  residential and commercial.

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Western European construction

• France investment in structures down 2 yoy in
  H1. However,residential investment 0.3 and
  other structures -3.5 as business and government
  investment decline. Residential investment to
  pick up through next year as housing starts are
  already increasing, but other structures to
  remain subdued.
• UK - supported by significant increase in
  government investment (public sector construction
  orders 41 in 2002 and 16 year to date). As
  well as private residential spending, both new
  build 19yoy 2003H1 and renovation 9. But
  order intake has slowed, particularly in the
  office sector and weaker growth expected.

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Western European construction

• Italy investment in structures up by 4.4 yoy
  in H1, with residential 1.3 and other
  structures 8. Government tax breaks for
  renovation work are providing a boost, as is
  government spending on roads and railways. But
  with the tax breaks losing their effectiveness
  and order book weakening, 2004 is expected to be
  a year of decline.
• Spain residential main driver of growth this
  year (up over 5yoy in 2003H1), but other
  construction also growing due to infrastructure
  work (2.5). Building approvals rising strongly
  for residential and non-residential structures
  pointing to an acceleration in 2004 and 2005.
  Continued catch-up of the economy to support
  sector in medium term, with immigration and
  buying of holiday homes providing additional
  support.

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Germany mired in recession

• Investment in structures has shown only one year
  of growth since 1995.
• Output down a cumulative 20 from the 1994 peak
  residential down by 16 and other structures by
  26.
• The number of employees has fallen by 800,000
  since the peak and rate of decline has
  accelerated in recent years. Fall of over 10
  likely this year.
• Industry confidence remains at a low level,
  little sign of orders bottoming out.
• German builders federation hopes that next
  year will be the trough, but still expecting a
  decline. We forecast investment in structures
  falling by 3.9 this year, 1 in 2004 and 0.7 in
  2005.

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Investment in structuresresidential
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Investment in structures other
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Investment in structures total
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Investment in structures
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Emerging market construction output
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Risks

• Low real interest rates have driven up house
  prices in the US and much of Western Europe.
  With rates to remain at low levels, could get
  further strength in prices and activity through
  2004, particularly in Western Europe. But
  downside risks to 2005/6 as rates rise.
• Risks appear evenly balanced in Germany, but a
  further downward lurch cannot be ruled out.
• Pronounced cycle in US residential forecasts
  risk over amplitude and timing. The very high
  level of US investment in non-residential
  structures in the 5 years up to 2001 point to
  capacity overhang and we have been cautious about
  recovery from the current very low levels.
  However, with the economy, and particularly
  investment, gathering pace the rebound in 2004
  could be stronger and more sustained.