Monday, 15 November 2010

UK Construction - The Impact of Recession (so far)

During the summer, I was invited to present to a group of AEC professionals about the impact of the recession on the UK Construction Industry. Whilst still a wee bit premature to be looking back with the benefit of hindsight - let's face it, we're not out of the woods just yet! - it is possible to gather some useful and interesting data on what has been happening during the past 3 years of economic downturn.

First, the basics; a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.

The first of 6 successive quarterly falls in UK GDP started in Q2 2008. The commonly accepted indicator that a recession has begun used to be, “two consecutive quarters of negative growth in GDP”. However, it's not quite so simple!

According to the National Bureau of Economic Research – UK (the official arbiter of recessions) the current recession began as early as December 2007.

5 key measurements NBER UK points to, with respect to a recession:

- GDP (a measure of a country's economic activity, namely of all the services and goods produced in a year)
- Retail/wholesale sales figures
- Overall employment
- Personal income
- Industrial production


Meanwhile, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) – USA, maintains a chronology of the beginning and ending dates (months and quarters) of U.S. recessions. The committee determined that a peak in economic activity occurred in the U.S. economy in December 2007.

So whilst many firms have reported that the UK economy really went into a nose-dive in Q4 2008, it was actually nearly a year earlier that the problems began!


Some interesting data was quoted in a Building Magazine editorial, back in June 2010;

Experian predicts a slight upturn for 2011 and 2012 – depending on recovery in the private sector and no more than £5bn cuts in the public sector. (RV - hmmm not sure that they could foresee the current round of cuts when that was written!)

FT review of Office of National Statistics data found the following unemployment figures:

  • 720% increase for architects
  • 655% increase for QS’s
  • Similar figures for Planners, Construction Managers & Engineers (500%+)

Earlier in the year, the Chartered Institute of Building (CIOB) published the results of their third annual survey, where they polled opinion from 1182 UK construction firms.

  • Results show that the industry is still suffering a skills shortage despite the recession and downturn in construction demand.
  • 77% of respondents believe there is a skills shortage in construction and 78% of those feel that the loss of skills will hinder the industry’s recovery when the economy improves.
  • 54% state that their company has had to make redundancies and 14% expect further redundancies to occur.

Similar comments echoed by Construction Skills, who observed; 'Forecasts demonstrate the severe effect that the recession is having on the UK construction industry, with rising job losses risking huge skills deficits in the long term.

The Construction Skills Network (CSN) shows the prognosis for the UK construction industry in the short term (2009 to 2010) is poor. The industry is expected to contract in construction output terms by at least 12% in 2009, followed by a more marginal decline of around 2-4% in 2010.

Consistent recovery is not forecasted until 2011 and even then, it is likely to be a slow and steady return to moderate levels of growth as confidence returns to the market.'


Construction News published the following figures;

  • UK Construction employment began to fall in 2008 with a decline of 1% over the year, however, CSN forecasts a much larger drop of 15% across 2009 to 2010, with the largest losses (around 13%) expected in 2009. The total number of construction job losses from 2009 to 2010 could be up to 450,000 if output contracts by the suggested higher rate of 13% in 2009. The slow recovery forecast from 2011 to 2014 is set to create around 125,000 jobs.

  • Coupled with the large number of workers who are set to leave the industry in the next 10 years through retirement, the need to increase the flow of apprentices and graduates into the industry and retain as many existing skilled workers as possible is vital if the UK is to sustain a skilled construction workforce.


Data from the CIOB survey, noted the following points about Apprentices & Graduates;

  • Only 37% are sure their companies are still employing apprentices.
  • 11% stated that their companies usually employ apprentices, but cannot afford to in the current economic climate.
  • 12% of respondents are aware of their companies recruiting more graduates.
  • Only 1% are recruiting the same number of graduates as before the recession.


So what are the lessons we can take from all of this? What mistakes have firms made and what are the opportunities for growth when things pick up?

Mistakes:

  • Panic firing/firing the wrong people, i.e. firing the best software users or even the CAD/BIM Manager!
  • Hoping things will get better sooner; waiting too long to make key strategic decisions
  • Freeze on technology investment
  • Freeze on all hiring
  • Freeze on all training & learning budgets
  • Lack of cash flow management


Opportunities:

  • Removal of ineffective staff (who perhaps shouldn’t have been hired in the first place?)
  • Better users remaining
  • More time to spend on IT strategy & ‘housekeeping’
  • Better hiring practices in future
  • Better training & learning plans in future
  • Better cash flow procedures
  • Better, more realistic business plans
  • More focused roadmaps for technology, marketing and business strategy
  • Better relationships with remaining clients
  • Leaner working practices
  • More enthusiastic adoption of BIM


A final word from an article which appeared in the FT in the summer; “Those businesses that survive a recession of this magnitude, are the ones who are best placed to ride the wave back up again!”.

R

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