November鈥檚 index is down but consumer spending is providing support

Noble Francis

It鈥檚 coming towards the end of the year and I don鈥檛 ever remember as much uncertainty as we鈥檝e seen in the last six months. Activity on the ground has been broadly maintained in most sectors since 23 June and most people are busy getting on with day-to-day work. The key impact of the uncertainty after the referendum would initially be seen in a fall in new contracts. We are only likely to see the full impact of the current uncertainty on construction output in 2017, when we also expect slower UK economic growth and rising inflation, as import costs following the depreciation of sterling feed through. The CPA/Barbour ABI index of contract awards in November was 7% lower than in September and 16% lower than a year ago. Falls in contract awards were seen in November in housing, education, health, offices and retail. Conversely, however, contract awards rose in hotels, leisure, factories and warehouses, all sectors buoyed by consumer spending this year.

Industrial warehouses: Online retail boosts new orders

The demand for new warehousing space is primarily set by consumer spending growth and the long-term trend towards shopping online instead of on the high street. While consumer confidence was seen to fall after the referendum, retail sales growth has been strong. The Office for National Statistics has reported that retail sales volumes were 7.4% higher and online retail sales were 26.8% higher than a year ago.

Take-up of warehousing space has been particularly strong in the key Midlands market and it is not surprising that new orders for warehouses in November were up 13% compared with October and 41% higher than a year ago. The relatively short lag between new orders and activity on the ground means that we should see this activity in the next 6-9 months.

However, with inflation rising in 2017 and a consequent slowdown in real wage growth, we are unlikely to see such growth in retail sales. Looking 18 months ahead, any further growth in warehousing new orders may depend on online sales eating into high street spending, so warehouse construction will be at the expense of retail construction.

Noble Francis is economics director at the Construction Products Association

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