Construction slump may force Britain back into recession

A weak performance by the construction industry in May could force the economy back into recession, say leading economists.

A 0.4% rise in activity last month was far below the estimates of most economic commentators, and follows a 12.4% plunge the previous month. The weak figures for May left the sector down 2.7% year-on-year.

The Office for National Statistics said the sector was dragged down by a 5.9% fall in private industrial work, which offset rises in public housing starts and new infrastructure projects.

Alan Clarke of Scotia Capital warned the economy could be slipping back into recession. "For some time we have seen significant risks that GDP growth will be around zero in [the second quarter]. The incoming monthly data for May have reassured our expectations of near zero growth. In fact, it is looking more and more likely that we might see another negative quarter for GDP growth," he said.

He joined several other economists in saying that figures this month showing a slowdown in manufacturing and severe pressure on the services sector, combined with the poor construction figures, could push the economy into reverse when official second-quarter GDP figures were published on 26 July.

Services sector data for May is due next week and is expected to reflect huge falls in consumer confidence over recent months. Several retailers have issued dire warnings of significant falls in turnover. John Lewis, which had proved immune to the retail slowdown until recently, said on Friday morning that year-on-year sales fell 3.4% to the week ending 2 July.

The figures are expected to put further pressure on the Treasury to explain how the economy will grow over the next few months and avoid slipping back into a second recession in three years.

The chancellor, George Osborne, has faced calls for tax cuts and a boost to spending to jolt the economy back into life after a sharp fall in consumer confidence this year. It takes two consecutive quarters of decline before an economy is considered to be in recession.

The National Institute of Economic and Social Research said on Friday that Britain was suffering a depression that would last longer than that of the 1930s.

The respected thinktank revealed its latest estimate for GDP growth in the three months to June at just 0.1%.
Construction industry expert Tom MacLennan, of accountants RSM Tenon, said the outlook for many building firms was bleak. "Looking at balance sheets, nearly 37,000 construction companies – almost a quarter of the sector – are at high risk of insolvency. By contrast, only 20,800 firms – 13% of the industry – have very healthy cashflow," he said

"Construction companies face a nasty combination of circumstances – materials are costly, the government has cut back on capital spending on infrastructure, and UK businesses remains chastened by the pre-crash building boom.

"Worse, when the industry hears bad news such as today's figures, these problems are amplified; negative publicity can push suppliers to ask for quicker payment terms, causing less working capital being available.

So, the question is whether a resurgent economy can increase demand for building, and save the sector from a downward spiral. As construction accounts for 6% of the UK's GDP, let's hope so," he added