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01 — The state of play

Responses to Experian Business Strategies latest survey of contractors suggest the UK construction industry is robust and many think it’s going to get even better. The overall activity index, incorporating responses from residential, non-residential and civil engineering, and small, medium and large firms to give an indication of industry-wide activity, rose one point to 56, placing it firmly in the increasing zone (above 50), suggesting activity continued to expand in August.

While respondents have been optimistic about activity throughout 2006, earlier in the year many did not intend to expand their workforces. In August, firms’ willingness to employ more people was renewed and the employment prospects index climbed to 54, its highest level in just under a year. The overall orders index declined two points to 69, while the tender enquiries index rose three points to 65.

Across the sectors, August’s results consistently reflect reasonable optimism about the current picture and considerably stronger optimism about the future. All three activity indices exceeded 50 and the only decline was seen in the non-residential sector’s activity index, although at 57 it remained at a high level despite the decline. In terms of tender enquiries and employment prospects, all three sectors saw their indices rise. The orders index declined in both the non-residential and civil engineering sectors.

Worthy of a mention is the five-point jump in civil engineering’s employment prospects index. Many civil engineering respondents intend to increase their workforces over the coming quarter.

02 — Leading Construction Activity Indicator

According to Experian Business Strategies’ Leading Construction Activity Indicator, the outlook is positive for the industry as a whole over the next three months. The chart (see below) shows the industry faltered in March but has been strengthening ever since. The measure increased two points to 57 in August and going forward we expect it to strengthen further.

The outlook over the coming quarter is for steady but robust month-on-month growth.

The current strength of order levels and tender enquiries is instrumental to our projection and reflects respondents’ optimism about the future.

The indices discussed here use a base level of 50 – above that level shows an increase, below that level a decrease.

03 — Labour costs

Labour cost inflation is running at between 2.6% and 5% a year, according to the majority of our panellists (53% of residential and non-residential firms and 71% of civil engineering firms). Costs are rising slightly more rapidly in residential and non-residential construction compared with civil engineering, although this may change over coming months if the expected acceleration in infrastructure activity is realised.

For 17% of residential and non-residential firms inflation is running at 5.1-7.5% and 26% are experiencing rises in excess of 7.6%. Twenty-nine per cent of respondents operating in the civil engineering sector report increases of more than 7.6%.

Three months ago, when our panellists last reported on labour costs, 34% of residential and non-residential firms and 48% of civil engineering firms said annual inflation was running at more than 5%. In general the labour cost burden faced by residential and non-residential firms has worsened slightly over the past quarter, while in the civil engineering sector it has improved.

04 — Regional perspective

Regional composite indicators for August paint a mixed picture. While activity increased in all but the North-west, in six regions composite indicators fell, suggesting respondents in these regions were a little less optimistic than they had been previously. The composite indicators incorporate regional activity, orders and tender enquiries from the past three months to provide a comparable indication of how each region’s construction industry is performing.

In five regions composite indicators rose in August. The West Midlands recorded the strongest increase and was up five points to 62. Wales’ index increased four points, the North-west’s two points and the East Midlands’ by one point. A one-point rise in the Eastern region’s index raised the indicator to 73, the highest level of all regions, pipping Scotland to first place for the first time in five months.

The fall in Yorkshire and the Humber’s indicator was a significant 10 points, although it remained strong at 61 despite this. Elsewhere declines were less severe. Scotland’s indicator declined by four points, the North-east, South-east and Northern Ireland’s all by three points and the South-west’s by two points.

The UK contractors’ index incorporates responses from firms operating in more than three regions during the month. At 70 in August, the UK composite indicator was up by one point from July.