The construction industry has complex interrelationships between buyers and decision makers which are becoming increasingly complicated, as it faces new demands and pressures such as sustainability and the introduction of BIM. With a cautious return to growth it is important to keep informed of changes in the construction market and its sectors. Monitoring changes and understanding industry forecasts can help inform your strategy, making sure you are well placed to make the most of new opportunities. The Construction Products Association are leading providers of industry forecasts and I asked Noble Francis, Economics Director, for further information on how they produce this.

Q – Forecasts are regularly quoted in the magazines where for the last five years they have been depressing us. But how do companies use them and what value do they get from them?

The forecasts may have been quite pessimistic for a few years but that is when they are most useful. In the years when the industry is contracting, and sharply, such as in 2008 and 2009, the forecasts were of great interest to companies as they need to know how bad it is going to get, which construction sectors are going to be most affected, where there may be opportunities in a difficult market and when sectors are going to recover. That’s why we do forecasts for 30 different sectors and forecast out five years.

In years when the industry is actually growing, you can spend time as a forecaster concerned about whether construction output will grow 2.3% or 2.5% but for a lot of companies they are more concerned with getting on with work. It is at times like these companies can use forecasts to identify opportunities.

There are two areas that companies need to look at. They need to consider which are growing markets and also, in markets that are not growing, increasing market share, where they need to compete the hardest. Companies should not just consider whether the construction market is growing, they also need to review the sectors and regions relevant to them. Currently, house builders are seeing growth in new build but there has been little growth in refurbishment and maintenance. In addition,the public sector is not great outside of London.

It is important to know which sectors are growing and specifically which are growing the quickest. This is where the opportunities are. You need to use forecasts to plan ahead, for guidance on setting budgets for the short-term and in the longer, broader term which market sectors to focus on and operate in. That is why the the Association go to 2017 and cover 30 different construction sectors.

Q – I believe you have a forecasting panel to help you decide future trends. Who is on that?

For the private construction sectors we have economic models that help in forecasting but that isn’t possible for public construction sectors, which are determined more by government and local authority spending plans, which can often change.

Our forecasting panel is made up of Director level and above, from people across the industry. Some of these people are our members;product manufacturers and distributors, as well as major contractors and cost consultants.

Heavy products, like steel and concrete, are used at the start of construction so provide a good near term indicator. Contractors work across lots of different sectors, so are a good guide on how the industry is developing. Cost consultants provide an indication of how workloads are changing, and how much of this is price inflation and how much volume. They also provide a good guide for the commercial sector; offices, retail etc. the largest construction sector.

Q – What information do you use to decide how the market is going to change?

We use new orders data, project pipeline data for medium-size projects, constantly monitor news on large projects, have historic data and forecasts of key macroeconomic drivers of sectors (for instance in the private housing repairs, maintenance and improvements sector we look at real household income, savings, housing equity, property transactions etc.) and also monitor government policies and the impacts of them (such as Help to Buy).

Q – You quoted all of your figures at 2005 prices until the last forecast when you changed to 2010 prices. Why do you use a fixed year and what makes you move the year?

The point of using forecasts fixed in a base year is to measure volume rather than value. What we essentially want to be able to tell people is how much sales of construction products and workloads on site will rise rather than what is happening due to prices.

Having a fixed year is important as it enables us to measure volume. Yet we do not want this base year to be irrelevant in terms of today’s prices. In addition, we also do not want to change the base too frequently otherwise we cannot build history. This is why we look to change the fixed year every five years, so the information reported stays relevant in today’s terms.

Q – Finally, why are some forecasts more optimistic than others?

The short answer is differing assumptions. The long answer is that, when forecasting, it is not an exact science. This is especially the case in any construction sector with a strong influence from government and more so in the longer term. For instance, Help to Buy is currently boosting the housing market, and house building, but what will happen when it finishes? Technically, the scheme finishes in 2016 but at the rate it is going the finance may run out in 2015. Will that be it or will government continue with Help to Buy or replace it with a policy that has a similar impact? Will the housing market be self-sustaining by then if there is no policy to boost the housing market post-2015?

So we know the projects in the pipeline, the key drivers and the wider economic environment, yet there is still a degree of uncertainty. For example, we know the UK needs to invest in energy, we are closing our coal and nuclear power stations to meet low carbon targets, and investment is needed. The project pipeline says this investment is not yet appearing and there are delays from the government. Investment in nuclear power is scheduled for the end of next year, but it is more likely to happen in 2015. Changes in government policy are hard to predict. We have to make an assumption; that is why our forecasting panel is so important. They are the best people to assess what might happen, their views are important.

Noble Francis, Economics Director at The Construction Products Association

With a Masters Degree and PhD in applied economics, Noble has over 10 years of experience producing economic forecasts. As Economics Director of the Construction Products Association, Noble has overseen all the Association’s economic publications including the Construction Industry Forecasts that have featured regularly in the Financial Times, in addition to radio appearances on the BBC Radio’s Today programme and television appearances on BBC News and Sky News. He also writes a regular column for Construction News in addition to an Economist’s Blog for Building magazine.

www.constructionproducts.org.uk

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