Construction industry prepares for a long winter

Near St Helens on Merseyside, Pilkington's Greengate factory spews out more than 10,000 tonnes of glass every week for the construction industry in sheets of varying sizes and colours; its two furnaces have not been turned off in the last 18 years. Sir Alastair Pilkington pioneered the "float glass" process – in which molten glass is formed into sheets by laying it on top of a bath of molten metal – 60 years ago, and it has been adopted as the standard for making flat glass around the world.

The 185-year-old company, now owned by Japan's Nippon Sheet Glass, has not fared too badly in the economic downturn. And at its rival on the other side of town – the Saint-Gobain factory in Mill Lane, which makes glass for shops, offices, schools and hospitals – operations director Steve Severs says: "None of the sectors are enjoying a strong time, but we won't suffer as much as a newbuild housebuilder. A glassmaker like us suffers from a lower newbuild level but does have replacement glazing opportunities to also supply."

But despite guarded optimism in one corner of the industry, construction as a whole is going to be one of the biggest casualties of the government's austerity squeeze. And the worst looks like it is yet to come.

"Some public sector projects are still ongoing but they will finish; the Olympics will finish as well and there will be a long road to see what next?" says Michael Conroy Harris, construction specialist at law firm Eversheds. The most optimistic would say the downturn will last two years, but some reckon it could be a decade if the public sector cuts go ahead, he adds. "There are no real signs of an upturn just yet and confidence, if anything, seems to be falling away. The impact of the national infrastructure plan will be interesting to see, although I think the reality of that is that it will take some time for the projects to feed through," he says.

The plan comprises 500 projects the government wants to see built over the next decade. In his autumn statement, chancellor

The government has pledged to spend an extra £5bn on infrastructure improvements in the next three years, with an additional £20bn to come from private sector sources, although details are vague. Despite the £5bn boost, capital investment will still fall by 30% (around £14bn) between 2010-11 and 2013-14, and most of the £5bn boost will come from 2013-14 onwards.

While the government is sticking with austerity for the moment, Brent believes that "there are plenty of schools and hospitals which have been put on hold and could be brought back rapidly should the government be looking to stimulate".

Grim picture

All the recent figures paint a grim picture in the construction industry, which makes up 8% of the economy. New orders hit their lowest levels since 1980 in the summer, according to the Office for National Statistics.

Construction tends to be one of the first industries to go into recession, and one of the first to come out. Big public and private sector projects are mothballed, while consumers tend to become more reluctant to fork out thousands of pounds for a new bathroom or loft conversion in uncertain times. And consumer confidence appears to have hit rock bottom, with the eurozone debt crisis threatening to push western Europe back into recession and Britain also teetering on the brink of another severe downturn.

In many countries, the share of the economy made up by construction has fallen sharply over the past decades. Construction as a percentage of GDP is the lowest in 55 years in the UK; it is at a 19-year low in the US and a 25-year low in France and Denmark.

The UK building industry is dominated by small firms – 93% of companies employ 14 or fewer people – which have been particularly hard hit. Builders' and plumbers' merchants in the supply chain are also suffering.

"We're being squeezed in every single direction," says Kevin Ellis of master builders Ellis & Hughes in Leicester, which specialises in designing and building extensions. He says £650,000 worth of jobs has been postponed in the past three months – the equivalent of just over half a year's work.

"North of Watford the situation is pretty dire. We in the north will benefit very little from easier access to lending. The only way to galvanise the building industry is to remove VAT on extensions and that sort of work."

Hundreds of construction and building-services firms have gone bust, including high-profile failures such as Connaught and Rok. The latest figures from insolvency specialists Begbies Traynor showed a 41% rise in companies facing "critical" distress over the last 12 months.

"The 1990s recession in construction was particularly bad," says Liberum's Brent. "Time will tell if this construction recession is worse than the early 1990s."

Notwithstanding the national infrastructure plan, there is still currently a dearth of big infrastructure projects. It is uncertain whether High Speed 2, the planned £32bn fast rail line between London and the Midlands, will go ahead. If it does, it could pick up the slack from London's £14bn Crossrail east-west commuter line project, due to finish in 2018. Opportunities may also present themselves in the electricity generation sector, either in the form of power stations or renewables installations.

But Britain's housing shortage, already bad, looks as if it will simply get worse. Over the lifetime of the current parliament (2010-15), the gap between what accommodation is needed and what is going to be built – 520,000 houses – is greater than the size of Birmingham (420,000 houses), the Federation of Master Builders estimates.