The RICS paints gloomy picture of UK economy but says slowdown may be short-lived

Growth in construction output slowed for the first quarter of 2005 due to a fall in public sector work, figures from the RICS revealed this week.

The Institution鈥檚 May Economic Brief, released on Wednesday, found that output grew by only 0.5% for the period, compared to 1.1% for the fourth quarter of 2004.

The slowdown in output may just be a temporary blip, according to the report, which said: 鈥淭he erratic nature of construction activity means that the slowdown may prove short-lived, with output still up 3.1% from a year ago.鈥�

The report also pointed to evidence produced by the European Commission, which shows construction order books being still above average.

In the public sector, the RICS found that investment spending had bounced back in early 2005, and this would eventually feed through to output (see graph). However, it raised concerns over the short and medium term, saying: 鈥淪ome cooling in construction output growth in the year ahead is likely, due in the main to the renewed slip in house building.鈥�

Some cooling in construction output growth in the year ahead is likely

RICS May Economic Brief

The RICS also said that last week鈥檚 suggestions that capital expenditure under the PFI might be reclassified as debt could potentially put a cloud over the medium term investment plans.

On labour supply, the report said shortages had reduced significantly in the last year. Construction wages were up just 2.9% for the year to early 2005, compared to 5% during the second half of 2004. The report said: 鈥淔irms no longer see labour shortages as a significant issue in restricting activity levels.鈥�

The report also commented on the latest state of the housing and commercial sectors as well as the economy general (see right). The report painted a gloomy overall picture currently for the UK economy, with inflation picking up, a reduction in consumer spending, a stalling in business investment and a slump in the housing market 鈥� but said it was too early to say whether this was the start of a general economic downturn.

The RICS May Economic Brief

Public sector investment activity
Source: National Statistics, DTI, RICS calculations

KEY FINDINGS:

The economy

While a period of disappointing economic performance looms, it is wise to wait for previous interest rate rises to feed through to inflation before becoming alarmed at the possible return of 鈥渟tagflation鈥� 鈥� where the economy stalls and inflation significantly exceeds the government's target rate.

Commercial property

The recovery in occupier demand eased off in April, with commercial property rents rising at the slowest annual pace since November 2004. The slowdown in rental growth was most stark in the retail sector, which witnessed monthly rental stagnation with a rise of only 0.1% in April.

Housing

Rising interest rates have not only hit housing market activity hard in the past year, but have also led to an increase in the number of households in financial difficulty.

*Public investment includes both construction and non-construction expenditure, four-quarter average

Downloads

Source

QS News