UK Recession in construction industry

7/28/2019 UK Recession in construction industry

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COUNTRY REPORT

ON

RECESSION IN UK

2012BY PRANAAY GUPTA


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WHAT IS RECESSION?

A decline in activities across the economy, lasting longer than a few months. It is visible in

industrial production, employment, real income and wholesale-retail trade. The technical

indicator of a recession is two consecutive quarters of negative economic growth as measuredby a country's gross domestic product (GDP); although the National Bureau of Economic

Research (NBER) does not necessarily need to see this occur to call a recession.

- Investopedia

So recession is a contraction of business cycle because of a general slowdown in economic

activities. A technical recession occurs when the level of real national output declines over

two successive quarters causing a contraction in the total volume of production in the

economy. But often a sharp slowdown in the rate of growth of output, spending and income

can feel like a recession.


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CAUSES AND CHARACTERISTICS OF

RECESSION

WHAT MIGHT CAUSE A RECESSION?

Recessions have a variety of causes and a wide range of symptoms.

Some causes are domestic in origin, stemming from policy mistakes on behalf of the

economic authorities. For example, the central bank might allow the money supply to grow

too slowly and keep interest rates above the level needed to maintain a steady rate of growth.

Higher interest rates have the effect of dampening down spending by both households and

businesses and can lead to plant closures and job losses.

External shocks can also bring about recession. For example in 1973-74 the large jump inworld oil prices caused a sharp rise in cost push inflation and an acceleration in wages.

Falling real purchasing power of consumers and a deflationary fiscal and monetary policy

from the government sent the economy into reverse.

SOME CHARACTERISTICS OF A RECESSION

Declining demand for output leading to higher levels of spare productive capacity

Contracting employment / rising unemployment as firms lay-off workers to controltheir costs

A sharp fall in business confidence & profits

A decrease in fixed capital investment spending because there is insufficient demand

to justify new capital projects

De-stocking and heavy price discounting - this leads to lower inflation

Reduced inflationary pressure in the labour market as unemployment rises

Falling demand for imports

Increased government borrowing

Source :

(http://tutor2u.net/economics/content/topics/macroeconomy/recession.htm)
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GREAT DEPRESSION UK (1929 32)

The Great Depression of 1929-32 broke out at a time when the United Kingdom was still far

from having recovered from the effects of the First World War. Economist Lee Ohanain

showed that economic output fell by 25% between 1918 and 1921 and did not recover untilthe end of the Great Depression, arguing that the United Kingdom suffered a twenty-year

great depression beginning in 1918. Relative to the rest of the world, economic output

declined mildly in the UK between 1929 and 1934.

A major cause of financial instability, which preceded and accompanied the Great

Depression, was the debt that many European countries had accumulated to pay for their

involvement in the First World War. This debt destabilised many European economies as

they tried to rebuild during the 1920s.

Britain had largely avoided this trap by financing their war effort largely through sales of

foreign assets. Britain had a net loss of 300 million of foreign investments, less than twoyears' investment on a pre-1914 average. The largest material loss during the war was in the

British Merchant Navy, which lost 40 percent of its merchant fleet to the U-boat attacks (but

this was replaced soon after the war). Along with loss of assets through enemy action, such

divestiture reduced British investments abroad by around 20% by 1918.

The resulting loss of foreign exchange earnings left the British economy more dependent

upon exports, and more vulnerable to any downturn in world markets. But the war had

permanently eroded Britain's trading position in world markets through disruptions to trade

and losses of shipping. Overseas customers for British produce had been lost, especially for

traditional exports such as textiles, steel and coal.

Heavy industries which formed the bedrock of Britain's export trade (such as coalmining,

shipbuilding and steel) were heavily concentrated in certain areas of Britain, such as northern

England, South Wales and central Scotland, while the newer industries were heavily

concentrated in southern and central England. British industrial output during the 1920s ran at

about 80-100%, and exports at about 80% of their pre-war levels, so there was little chance of

Britain being able to amass enough capital to restore her overseas investment position.

Source :(http://en.wikipedia.org/wiki/Great_Depression_in_the_United_Kingdom)
http://en.wikipedia.org/wiki/Great_Depression_in_the_United_Kingdomhttp://en.wikipedia.org/wiki/Great_Depression_in_the_United_Kingdomhttp://en.wikipedia.org/wiki/Great_Depression_in_the_United_Kingdomhttp://en.wikipedia.org/wiki/Great_Depression_in_the_United_Kingdom


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YEAR 2012

QUARTER 1

GDP went down by 0.2 per cent in the first quarter of 2012, its the second successive

period of negative economic growth. The main reason for the fall in GDP was theconstruction sector, where output had fallen by 3 per cent between the two latest

quarters. But the dominant services sector of the economy grew very slowly while

industrial production fell slightly.

There has been no growth in the economy over the past year and has recovered lessthan half the output lost during the recession in 2008 and 2009.

There were some signs of improvement in the labour market with a very less rise inemployment in the latest period and a slight drop in unemployment. But there were

mixed results because the rise in employment was entirely among the part time

workers, and there was a drop in the number of people employed full time.

There was a growth in retail sales volumes in March but this was boosted bypurchases of fuel at the end of the month, as well as the effect of unseasonably warm

weather.

There is a continuous decline in the real earning as a result of the combination of afurther decline in average earnings growth and a slight pick-up in consumer price

inflation


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1. There has been a decline in Oil and gas extraction for several years, and dueto which there is a deduction of an average of -0.1percent from GDP in the

mining and quarrying .2. There was a resilient recovery in the manufacturing sector in the middle of

2011 but after that it has contracted by 0.9 per cent.3. Meanwhile there is a very modest growth in the services sector which

accounts for three quarters of whole economy output .

Losses and gains in economic output of key sectors during the recession(2008Q1 - 2009Q2) and recovery (2009Q2 - 2012Q1; per cent)

SOURCE: ONS


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CONSTUCTION SECTOR

The primary cause of the fall in the GDP was the construction sector

In the construction sector there was an estimate fall of 3% between the latest twoquarters

The construction sector accounts to a total of 7.6% of the GDP

And during that period the weakness of the construction sector has accounted formore than half the drop in GDP

Source: ONS

As seen above, In the year of 2012 the difference between GVA excluding construction

sector an the total GVA is about -0.25.


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SERVICE SECTOR

There was a very slow growth in the service sector, it was 1.6 per cent in Januaryto 0.8 per cent in February. Since April 2011 this was the weakest growth andwas only the fourth time it has dipped below 1 per cent during the last two years.

There were five main subsectors responsible for the weakening of the servicesector growth:

1. distribution2. hotels & restaurants3. transport4. storage & communications

5. business services & finance

The government and other services being flat, on a month on month basis. It wasthe only sector to maintain growth similar to previous month.


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WIDENED TRADE DEFICIT

In the year 2011 there was a significant narrowing of the trade deficit but the tradedeficit widened in January and February and now the trade deficit is equal to theamount that was in November 2011


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QUARTER 2

The second estimate of Gross Domestic Product (GDP) for 2012 Q2 reports that theUK economy contracted by 0.4 per cent. Although an upward revision from the firstestimate of minus 0.7 per cent published last month, it is nevertheless still indicative

of weak economic output. Seventeen quarters after the start of the 2008 recession,GDP growth remains significantly below its historical average and 4.2 per cent lowerthan its pre-recession peak. GDP growth can be described as broadly flat over thepast two years.

The preliminary estimate of GDP for the second quarter of 2012 was estimated onthe basis of a substantial drop in output in June, largely founded on the experiencesin 1977 and 2002 when the Silver and Golden Jubilee celebrations respectivelycaused identical changes to the pattern of bank holidays. The second estimate ofGDP for this quarter now includes real June figures which allow us to have a clearerindication of the impact of the Diamond jubilee celebrations on economic output.

Source : Economic Report 2012 (ONS)


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CONTRIBUTION TO GDP GROWTH BYINDUSTRY

Reflecting weak domestic and global demand, the output measure of GDP continuesto paint a weak picture with contraction broad based across the production, serviceand construction sectors.

Despite an upward revision of quarterly construction growth from minus 5.2 per centto minus 3.9 per cent in the second quarter of 2012, this sector remained the largestcontributor to the negative growth of GDP.

Services output, which makes up over three-quarters of total output, contracted by0.1 per cent in the second quarter of 2012, following a modest growth of 0.2 per centin the previous quarter.

Among the service industries, all major sectors (apart from government) reported adecline in quarterly output with transport, storage and communication recording thelargest fall (0.7 per cent in the second quarter).

At 0.3 per cent, government output growth remained unchanged from the previousquarter. The production industries recorded a contraction of output with pockets of

growth recorded in the utility (electricity, gas and air) sector.SOURCE: Economic Report 2012 (ONS)


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CONSTRUCTION SECTOR

There was a fall of 3.9 per cent Construction output in the second quarter of 2012 in

comparison with the first quarter of 2012. There was a fall of output fell in eight of thenine sectors reflecting continued stagnation and weakness in the industry. Thelargest fall was seen in the new infrastructure, which fell by 8.6 per cent on the firstquarter of 2012 and by 24.8 per cent compared with the second quarter of 2011,when London Olympic projects were underway.

As now the construction projects linked to the Olympics over, the sector is nowincreasingly dependent on new developments in the housing sector that remainsweak at the moment. Additionally, small and medium sized enterprises make up asignificant proportion of the industrial make-up making access to finance a potentialobstacle to growth. This is particularly significant because in times of economic

uncertainly, they may not have the same access to financial markets as larger firms.Cuts in capital investment and weak business confidence have continued to act as adrag on this sector.

Output in the construction industry, constant 2005 prices, seasonally adjusted

SOURCE: Economic Report 2012 (ONS)


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SERVICE SECTOR

The recent performance of the largest contributing service sector, which is the keysource of GDP output growth in the last decade, has remained subdued compared to

its historical average.

Over the past couple of years, factors such as weak consumer confidence andsluggish real wage growth have contributed to the anaemic performance of the UKservice sector.

In the second quarter of 2012 total output contracted by 0.1 per cent following a 0.2per cent growth in the previous quarter. The quarterly growth in the second quarter isunrevised from previously published estimates.

Within this sector, quarterly output growth of the main industrial sectors declined in

the second quarter of 2012, apart from the government sector which recordedgrowth of 0.3 per cent in the quarter.

Distribution, hotels & restaurants contracted by 0.1 per cent while transport, storageand communication, although revised upwards by 0.7 percentage points, stillcontracted by 0.7 per cent.

Business services and finance (which makes up over 37 per cent of total services)was revised downwards to minus 0.1 per cent in the second quarter of 2012 from theinitial estimate of a 0.1 per cent growth.

This fall has been mainly due to activities of head offices, management consultancyactivities and architectural & engineering activities, technical testing & analysis.


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TRADE

Seasonally adjusted, the UKs deficit on trade in goods and services was11.2 billion in quarter two 2012, compared with a deficit of 7.8 billion in thepreceding quarter.

The worsening in the deficit is attributable to the increase in the deficit ontraded goods, which rose from 25.0 billion in the first quarter of 2012 to28.3 billion in the second quarter of 2012. Total exports volumes (excludingoil and erratic items) fell by 3.3 per cent in the second quarter while importvolumes fell by 0.4 per cent.


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QUARTER 3

The economy rebounded strongly in the third quarter of 2012, growing by 1 per centfrom the second quarter level which was affected by the Diamond Jubilee bank

holiday.

Although this was the strongest quarterly growth since 2007, the underlying patternis one of subdued economic expansion. The economy is no larger than it was a yearearlier, even with the benefit of Olympic and Paralympics ticket sales which added0.2 per cent to the level of GDP in the third quarter of 2012.

Other indicators of economic activity paint a mixed picture. The labour marketcontinues to perform strongly. Employment levels reached a record high of 29.6million in the 3 months to August, although at 71.3 per cent of the working agepopulation it remains well below the peak rate of 73.1 per cent recorded in 2005.

Retail sales volumes also rose in September. But exports and industrialproduction both recorded falls in the latest months figures. Consumer price inflationfell to 2.2 per cent, but the squeeze on real earnings growth persists, albeitat a much reduced rate.

Latest public finance statistics suggest that the overall level of public sectorborrowing in the first half of the 2012-13 financial year was only slightly higher thanfor the same period in 2011-12.


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Contributions to quarterly GDP growth byindustry, 2012 Q2 and 2012 Q3

The growth in output was concentrated in the services sector which grew by 1.3 percent, the strongest quarterly growth for five years. Production industries grew by 1.1per cent, contributing 0.2 percentage points to GDP growth in the latest quarter.

However construction output fell again, albeit by 2.5 per cent which was less than inthe previous two quarters. Chart 2 shows the contributions to growth in the last twoquarters, highlighting the relative contributions of the various economic sectorsto GDP growth.


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The Olympic and Paralympics Games

The Olympic and Paralympics Games are likely to have had an impact on GDPgrowth in the third quarter of 2012. The largest contribution to services sector growth

was in sports activities. This includes the impact of ticket sales for the Olympics andParalympics, all of which is credited to the quarter in which they were actually used,rather than the period in which the tickets were purchased, in accordance withinternational reporting guidelines. These added 0.2 percentage points to GDPgrowth in the third quarter. The employment activities sub-sector (includingemployment agencies) also grew strongly in the third quarter, perhaps reflecting thetake-up of temporary Olympics jobs, as well as greater buoyancy of the labourmarket.

The services sector is likely to have been a beneficiary of the Olympic and

Paralympic events held over the summer. The sector grew by 1.7 per cent in Augustcompared to the same month a year ago with government and other servicesrecording the strongest annual growth among the main categories (3.2 per cent).Most of the strength in services is concentrated in sports activities, which asdiscussed above includes spending on Olympic ticket sales. Output of the arts,entertainment and recreation sector (which includes sports activities) was more than15 per cent higher in the three months to August, compared with the previous threemonths. Total services grew by 0.2 per cent in the same period.

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UK Recession in construction industry