October/ November2012 Overview European economic roundupOverview Economic data have taken an afterthought EUROPE ECONOMIC SENTIMENT INDICATOREuropean economicroundup for markets in recent weeks, as politics and Composite Economic Sentiment Indicator (Average=100) GermanyDashboard of European its impact on future economic policy have UK Polandconstruction trends taken centre stage. The U.S. elected Barak Turkey 120Commodities Obama for a second term as President, 110Exchange rates China’s leadership transition gets underway, 100 and European leaders are due to meet to 90UK activity indicators discuss the EU’s budget. 80Economy 70Construction In Europe, financial market conditions appear 60 50 to have stabilised following the European 40Europe: A closer look Central Bank (ECB) announcement toCzech Republic support government debt markets inRussia countries in distress, but investor sentiment Source: European CommissionGermany remains fragile. Public finances sustainability EUROPE ECONOMIC SENTIMENT INDICATOR concerns remain centred on the ability of Balance (sa) Spain and Greece to refinance their debt 50 Industry Services Construction obligations. 40 30 Key barometers of global and European 20 economic activity have pointed to a 10 0 softening in recent months. The latest Global -10 Manufacturing PMI shows that the downturn -20 in the global manufacturing sector -30 moderated in October, with the performance -40 of the North American economies, Russia -50 and Turkey proving to be brighter spots. While stimulus across a number of emerging Source: European Commission markets fuels expectations for a revival in activity, the U.S. outlook remains EUROPEAN EAST-WEST DIVIDE GDP Forecast complicated by concerns surrounding the Annual % “fiscal cliff”. 10 8 Europe remains the main centre of weakness, as production declined in the big- 6 four Eurozone countries - and the UK. Turkey 4 Domestic markets generally remain subdued Russia Poland UK and the downturn in exports continues. 2 Germany Consequently, economic sentiment fell Euro area 0 across the board, with the exception of the UK, where better economic data have lifted -2 sentiment over the past month. Source; IMF
Against this backdrop, the IMF revised down its forecasts for European growth, taking the view thatthe recovery will be subdued and will take longer than initially thought. Despite the continuing talk ofthe need for growth across the Eurozone, very weak activity in most countries is limiting fiscalconsolidation. Growth engines in Europe are short of supply, as the private sector continues todeleverage, while government finances are a big drag on growth in most of the regions economies. EUROPE: ECONOMIC FUNDAMENTALS 2013 GDP f Gross Public Debt Budget Deficit 10-Year bond yield Unemployment CPI Inflation % % of GDP % of GDP October % Annual %UK 1.1 86.0 -3.73 1.79 7.9 2.2Germany 0.9 82.8 -0.76 1.5 5.4 2.1France 0.4 91.0 -1.65 2.18 10.7 2.2Spain -1.3 76.0 -11.00 5.71 25.6 3.5Italy -0.7 126.1 -2.78 5.06 10.6 3.4Greece -4.0 144.3 -8.12 18.22 23.9 0.3Portugal -1.0 117.5 -5.85 8.28 15.7 2.9Ireland 1.4 111.5 -7.43 5 15.0 2.4Poland 2.1 57.0 -2.16 4.69 10.1 3.8Romania 2.5 35.6 -2.74 6.65 7.1 5.4Hungary 0.8 77.7 -4.36 7.38 10.9 6.4Russia 3.8 10 1 7.71 5.2 6.6Turkey 3.5 39.2 2.6 8.1 7.9 9.2Source: Government Statistics, Central BanksData: latest availablered < 0.0% > 80% > 5% > 7% > 7% > 4%yellow 0.0 - 0.5% 60 - 80% 3-5% 3-7% 5-7% 2.5-4%green > 0.5% < 60% <3% < 3% < 5% < 2.5%Dashboard of European construction trendsEuropean (EU27) construction output in August held relatively stable compared to July, but remainedweak overall. In the three months to August, output fell 2.2 percent on the preceding three monthsand down 5.7 percent on a year ago. Civil engineering saw the biggest decline, down 8 percent year-on-year, while building dropped 5 percent. Slovenia saw the largest decline, down 14.6 percent in thethree months to August compared to the preceding three months, followed by Belgium (-8.3 percent),Romania (-6.4 percent) and the UK (-5.7 percent). Construction activity rose in Hungary and Austria(2.3 percent), as well as France (0.4 percent).Sentiment in the European construction industry Insufficient demand remains by far the largestfell to its lowest level in two years in October, as drag on construction activity in Europe.building activity dropped and new order bookscontinued to decline.EUROPE CONSTRUCTION SENTIMENT SURVEY FACTORS LIMITING CONSTRUCTION ACTIVITY Balance (sa) Insuf f icient demand Building activity over past 3 months Weather conditions 30 Shortage of labour Evolution of current order books Balance (sa) 20 Employment Expectations Shortage of materials/ equipment 50 Financial constraints Price expectations 10 40 0 -10 30 -20 20 -30 -40 10 -50 0 -60 -10 Source: European Commission Source: European Commission
Construction production in the EU27 fell 4.9 Construction in 2012 is strongest in Turkey,percent in the first eight months of this year. Belgium, Sweden and Germany. Poland and Romania have slowed sharply in recent months. CONSTRUCTION PRODUCTION CONSTRUCTION PRODUCTION (EU-27) Top performers 2012Index Annual % Construction production index 3M avg Annual Poland Turkey2005=100 3M avg Building construction (y-o-y) Belgium Romania 110 8% 30% Sweden Germany Civil engineering construction (y-o-y) 105 6% 4% 20% 100 2% 95 10% 0% 90 -2% 85 0% -4% 80 -6% -10% 75 -8% 70 -20% -10% 65 -12% -30% 60 -14% Source; Eurostat Source; EurostatPrime European office rents continued to ease in Office take-up in Q3 2012 decreased 5 percentQ3 2012 on aggregate, with the exception of in aggregate in the main European cities, withStockholm and Munich, as slower economic take-up in the year to date down 15percent year-growth impacts on occupier demand. on-year. Take-up fell both in Western Europe (-2 percent) and the CEE (-17percent).EUROPE PRIME OFFICE RENTS EUROPE PRIME CAPITAL VALUES EUR/ sqm pa EUR/ sqm pa 1400 20 Year-on-year 15 Quarter-on-quarter 1200 10 1000 5 800 0 600 -5 400 -10 200 -15 0 -20 Source: Jones Lang Lasalle Source: Jones Lang LasalleRetail investment in Europe rose to €7.1 billion in While the economic uncertainty in the EurozoneQ3 2012, up 12 percent over Q2, but still 18 has had an impact on occupier demand in thepercent lower compared to the 3-year average. logistics and industrial sector, prime rental levels have been supported by low volumes of new supply. Prime logistics rents have remained broadly unchanged in the majority of European markets since the start of 2011.EUROPEAN RETAIL INVESTMENT EUROPEAN LOGISTICS MARKET Prime Rents Prime Yields Europe EUR/ sqm/ pa Trend % Trend Spain/ Amsterdam 85 7.25 Portugal Barcelona 72 8.25 Italy Brussels 45 7.25 Bucharest 48 10.5 CEE Budapest 54 9 Nordics Kiev 57 11 3-Year qty avg Lisbon 60 8.75 Benelux Q3 2012 London City 160 6.25 France Madrid 72 8.25 Milan 55 8Germany Moscow 104 11 Paris 53 7.25 UK EUR, million Prague 51 8 0 2,000 4,000 6,000 8,000 10,000 Warsaw 66 7.75 Source: CBRE Zurich 140 6
Exchange ratesA patchy global economic performance, official intervention in currency and credit markets by centralbanks, elections in the U.S., and commodity price swings have impacted on currency markets. TheBritish Pound has shown little movement in October falling slightly against the Euro and showing nosignificant change towards the US Dollar. Better than expected UK GDP growth in Q3 instilled apositive sentiment on the Pound and lessened the prospects of deeper monetary stimulus. The Eurohas been relatively stable despite a struggling economy, as the ECB’s announcement toconditionally purchase European Government bonds appears to have calmed markets. EXCHANGE RATES AGAINST THE BRITISH POUND BRITISH POUND % change since beginning of 2012 against the....Latest: 25 Oct 2012 1£ buys… % since 28 Sep % YTDEuro 1.246 -0.8% 4.2% Yen 8.2%Dollar 1.614 0.0% 4.4% Danish Krone 4.6%Yen 129.4 3.0% 8.2% Dollar 4.4%Czech Koruna 31.07 -1.7% 0.7% Lithuanian Litas 4.2%Hungarian Forint 347.7 -2.8% -7.0% Euro 4.2%Lithuanian Litas 4.301 -0.8% 4.2% Swiss Franc 3.7%Latvian Lats 0.867 -0.8% 3.6% Latvian Lats 3.6%Polish Zloty 5.162 -0.2% -3.1% Russian Ruble 1.7% Swedish Krona 1.5%Russian Ruble 50.66 0.5% 1.7% Czech Koruna 0.7%Turkish Lira 2.907 0.2% -0.4% Norwegian Krone 0.2%Danish Krone 9.291 -0.7% 4.6% Turkish Lira -0.4%Norwegian Krone 9.311 0.7% 0.2% Polish Zloty -3.1%Swiss Franc 1.507 -0.7% 3.7% Hungarian Forint -7.0%Swedish Krona 10.81 2.1% 1.5% -9% -6% -3% 0% 3% 6% 9%Source; Bank of England Source: Bank of EnglandCommoditiesCommodity prices remain volatile, being OILpulled between weak global demand, US$/bbl 130 Brentinvestor sentiment and geopolitical risks. WTI 120Oil 110The trend from the previous months of oilprices peaking in the middle of the month 100and then falling before the end of the monthcontinued to October. During the month, the 90price of Brent reached a two-month low of 80US$107 per barrel, but overall averagedUS$112 in October - only a dollar shy of 70August and September averages of US$113per barrel. While demand realities are Source: RBS Databankexpected to continue to pull oil prices down COMMODITY PRICESwith the outlook for key emerging markets in Aug-12 Sep-12 Oct-12 % YTDparticular China a key factor, supply worries “Brent” Oil ($/bbl) 113 113 112 5% Copper ($/t) 7,492 8,068 8,115 7%amid Middle East geopolitical tensions are Aluminium ($/t) 1,838 2,054 1,989 1%likely to pose a strong upside risks to oil Steel billet ($/t) 353 330 331 -41%prices in the months ahead. Source: FT, LME, Cruspi LME STEEL BILLETBase metals $/t cash contractCopper LME prices traded between 700US$7,720 and US$8,340 per ton in 650October, relatively unchanged to levels 600seen in September. Year-to-date, copper 550prices are up 7 percent. Aluminium prices 500have not changed significantly over the 450past months and averaged just below 400US$2,000 per ton in September. 350 300Global steelGlobal steel prices continued to drop in Source: LMEOctober, completing six months in thisdownward trend. The CruSpi global steel price index recorded a 2.8 percent decline in Octobercompared to September, with the index down 8.7 percent year-to-date. The LME steel billet price onaverage did not change significantly since September, but has fluctuated considerably throughoutOctober between US$309-344 per ton.
UK activity indicatorsEconomyRecent weeks have seen some tentatively encouraging signs about the economy, with the UKperforming better than many of its European peers. However latest survey evidence suggests thatthe UK economy continues to struggle, despite Q3 2012 GDP rising by 1 percent quarter-on-quarter.Consequently, whilst the UK economy has exit recession, business and consumer caution, as wellas public sector spending cuts are likely to continue to dominate the UK economic scene so thatgrowth is likely to remain sluggish near term.Monetary PolicyThe Bank of England’s Monetary Policy Committee continued to hold its policy on both interest ratesand asset purchase programme during its November meeting, as July’s £50 billion extension to QEis due to run through to November while the Funding for Lending Scheme was only launched inAugust and is in its early stages. Despite some signs of economic improvement, it is extended weakeconomic activity rather than inflation that remains the greatest risk facing the UK economy whichmay prompt the Bank of England to deliver further stimulus still this year.GDP growthThe UK economy posted an impressive- UK ECONOMYlooking 1 percent quarter-on-quarter growth GDP: Index GDP Q-o-Q 2006=100during the third quarter of 2012, but just as 110 Manuf acturing 8% Business and Financial Servicesthe second-quarter GDP contraction of 0.4 Construction 6%percent markedly overstated the economy’s 105 4%weakness, the third-quarter expansion is 100likely to overstate its strength. Indeed, year- 2%on-year, GDP remained a marginal 0.1 95 0%percent down. Growth during the quarter -2%was boosted by additional working days 90 -4%compared to the second quarter, and an 85overall positive impact from staging the 2012 -6%London Olympic and Paralympic Games. 80 -8%The ONS estimates that sales of Olympic 2007 2008 2009 2010 2011 2012 Source: ONStickets increased GDP growth in the quarterby 0.2 percentage points. Of the main components of the output measure of GDP, the Gamesappear to have had the most impact on the service sectors, while there is little evidence that theyhad an impact on the manufacturing industries or the construction sector. Services sector activityrose 1.3 percent both over the quarter and on a year ago.Manufacturing activity improved 1.1 percent compared to the second quarter, but remained 0.8percent down year-on-year. Construction remained the weakest sector, declining 2.5 percentquarter-on-quarter and down 10.8 percent on a year earlier. Most analysts expect the UK economyto continue to stabilise in the final quarter of this year, helped by easier inflation and a relatively firmlabour market. However, growth will be very modest at best and trading conditions in the services,manufacturing and construction sectors will remain challenging, as the UK economy continues toface headwinds from a weak external environment and tight fiscal policy.Manufacturing output and prices MANUFACTURING OUTPUT & PRICESManufacturing output in August fell 1.1 Output Index Manuf acturing Output Prices - Annual (2009=100)percent compared to July and down 1.2 Manuf acturing Input Prices 120 Manuf acturing Output Prices 40%percent year-on-year. Domestic demandremains muted by subdued consumer 115 30%spending and tight fiscal policy, while export 110 20%demand is hampered by a weak Eurozone 105 10%economy. Input prices eased in September,down 0.2 percent on August and down 1.2 100 0%percent year-on-year. Manufacturing output 95 -10%prices rose 0.5 percent during Septemberand up 2.5 percent on a year ago, as 90 -20%manufacturers sought to recover margins. Source: ONS
UK Business ConditionsThe Bank of England’s survey of Business Conditions for September reveals that: Consumer spending increased modestly. Summer events and good weather are seen as main contributors to this increase. There was a slight improvement in the housing market, but expectation is that this improvement will not be sustained as the economic outlook restrains both potential buyers and sellers. The cost of borrowing showed signs of stabilizing in September, with larger firms continuing to fare better than smaller ones who struggle to secure credit. Overall the demand for credit remained modest. Manufacturing output and export production both slowed down further over the month as national and Eurozone demand decreased. Construction output continued to fall further, primarily due to slow recovery in the private sector activity. Investment intentions continued to MANUFACTURING AND CONSTRUCTION ACTIVITY decline as companies looking to Scores 4 reduce costs, meet production 3.5 standards and diversify/improve 3 2.5 their business operations are wary 2 1.5 of investing in the current 1 0.5 economic climate. 0 Output price inflation eased as a -0.5 -1 result of weaker demand and -1.5 Manufacturing - Domestic -2 Manufacturing - Exports previous falls in input costs. -2.5 Construction -3 Consumer price inflation has -3.5 increased slightly, partly as a result -4 of increases in some fresh food and energy prices. Source: BoEBusiness ActivityIn contrast to the positive Q3 GDP data, UK ECONOMIC ACTIVITYlatest survey evidence points to a renewed PMI 65 Expansionweakening in UK activity in recent months. Manuf acturing Sector Services SectorThe decline in the UK manufacturing sector 60gathered pace in October according to the 55latest Markit/ CIPS manufacturing PMI, 50which dropped to 47.5 from 48.4 in 45September. UK manufacturers during the 40month faced a combination of declining 35exports, weaker domestic demand andrising cost pressures. Activity was 30 Contractionparticularly weak in the intermediate and 25 Jul Jul Jul Jul Jul Jul 2007 2008 2009 2010 2011 2012investment goods sectors, but strengthenedin the consumer goods sector. The Markit/ Source: MarkitCIPS services PMI dropped to 50.6 inOctober, down from 52.2 in September, signaling a stalling in sector activity. New orders growthweakened in October, while competitive pressures increased. Input cost inflation remained solid,with a rise in the national minimum wage reportedly contributed to higher average staff costs, whileenergy, food and fuel prices were also signalled as having increased during October.Credit conditions CREDIT CONDITION SURVEY Credit AvailabilityCredit conditions remained relatively Balance ofunchanged for the corporate sector in Q3 Respondents 302012, but eased for consumers, according 20to the latest Bank of England Credit 10Condition Survey. Highlights: 0 Lenders reported a marked -10 increase in the amount of secured -20 credit made available to -30 Coporate Credit Commercial Real Estate Sector households. This is expected to -40 Secured Credit to Households increase further, with the Funding Unsecured Credit to Households -50 for Lending Scheme widely cited -60 as contributing to improved secured credit availability. Source; BoE
Unsecured credit to households remained broadly unchanged in Q3 2012. Credit conditions in the corporate sector vary by the size of business. Lenders report that there had been no change in the amount of credit made available to small, medium and large firms in Q3 2012. Lenders continue to expect no change in credit availability to the corporate sector overall, although easier wholesale funding conditions are expected to have a positive impact on credit availability. Credit availability to the commercial real estate sector also remained broadly unchanged in Q3, but is expected to increase slightly in the final quarter of 2012, despite commercial property prices continuing to exert a negative influence on credit availability. Demand for corporate credit remains subdued overall due to a lack of M&A activity and capital investment, as firms remain cautious given the current economic environment. Spreads had widened slightly for medium-sized firms in Q3, but had remained unchanged for small, large and other financial corporations. In contrast, some lenders report that the commercial real estate market had seen a large increase in spreads and fees.Consumer price inflationConsumer price inflation eased to 2.2 INFLATION AND INTEREST RATESpercent in September, down from 2.5 Annual Bank Base Rate CPI RPIpercent in August. This is the lowest level 6.0%of inflation reported in three years. The 5.0%retail price index also fell to 2.6 percent, 4.0%down from 2.9 percent in August. The dropin inflation was due to gas and electricity 3.0%price rises in 2011 falling out of the 2.0%comparison calculation. However recent 1.0%rises in oil prices and utility bills areexpected to put upward pressure on 0.0%inflation in the months to come. -1.0%Nevertheless, underlying price pressures -2.0% Source: BoE, ONSremain muted due to still-below-trendeconomic activity.Labour Market and Average Earnings UK AVERAGE EARNINGS Annual, 3-months moving averageIn contrast to latest business surveys which 8.0%point to a softening in the labour market Whole economy Constructionacross the manufacturing and construction 6.0%sectors, official data show that labour 4.0%market conditions remain resilient,supported by restrained earnings growth 2.0%and more people working part time. Theemployment rate rose to 71.3 percent in the 0.0%three months to August, the highest figure -2.0%recorded since spring 2009. Theunemployment rate fell to 7.9 percent, -4.0%down from 8.1 percent in the precedingthree months. Average weekly earnings for Source: ONSthe whole economy including bonuses RETAIL SALES AND HOUSE PRICEScrept up to 1.7 percent in the three months HPIto August, which is still below historic Retail Sales excl f uel Retail Sales (LHS)standards and below consumer price 3.5% House Prices (RHS) 18% 3.0%inflation. 14% 2.5% 10% 2.0%Retail Sales 1.5% 6%Retail sales in September rose by 0.6 1.0% 2% 0.5% -2%percent over the month and up 2.9 percent 0.0% -6%year-on-year. The underlying trend in sales -0.5% -10%growth also remained relatively firm, with -1.0% -1.5% -14%retail volumes up 2.8 percent in the third -2.0% -18%quarter compared to a year ago. Latest 3 months Y-o -Y Source: Nationwide, ONS
Survey evidence from the British Retail Consortium and the CBI confirmed the increase in retailsales in September, supported by employment growth, lower inflation and consumers’ preparationsfor the winter months. However, consumers continue to face significant pressures, which is likely tolimit the acceleration in retail sales. Inflation continues to run ahead of average earnings growthimpacting on spending power, while the fragile economic backdrop also weighs on sentiment.Mortgage lending and house pricesMortgage approvals for house purchases HOUSE PRICE INFLATIONrose modestly to 50,000 in September from Average House Price £ Average House Prices Annual HPI48,000 in August and an 18-month low of 200,000 Annual HPI 30%44,400 in June. However, mortgage 25%approvals remain 2 percent down year-on- 175,000 20%year and significantly below long-term 15% 150,000averages of 86,000 per month. Latest 10%house price data also point to a soft UK 125,000 5%housing market. House prices rose by 0.6 0% 100,000percent in October, according to the -5%Nationwide, but remained 0.9 percent down 75,000 -10% -15%year-on-year. Annual house price growth 50,000 -20%has been in a narrow band between 1.5percent and -1.5 percent since late 2010, Source: Nationwideas weak market activity has been partiallyoffset by limited supply on the market.Public Finances in SeptemberWhilst public finances have shown a modest improvement in September, during the first five monthsof this fiscal year, public finances were appreciably worse compared to a year ago, as a weakeconomy hit tax revenues. Public sector net borrowing stood at £12.8 billion (excluding interventions)in September, down from £13.5 billion reported a year ago and helped by better economic activity inthe third quarter and spending cuts. Public sector net debt excluding temporary effects of financialinterventions stood at £1,065.4 billion (67.9 per cent of GDP) in September, up from £1,044.8 billion(66.7 per cent of GDP) in August. The higher deficit to GDP amount could increase the borrowingcosts in the UK, however it is expected that investors would keep the interest rate low as theEurozone continues to be unstable.ConstructionConstruction OutputConstruction output in the three months to August totalled £28.9 billion, down 2% on the precedingthree months and 12 percent lower compared to the same period last year. Within this, commercialwork at £5.69 billion saw the largest drop, down 5 percent on the preceding three months.Residential construction also weakened, with both public and private housing falling 4 percent in thethree months to August compared to the previous three months. Infrastructure rose in the threemonths to August, up 3 percent on the preceding three months, but output remained down 18percent year-on-year. Industrial construction also improved, up 1 percent on the previous threemonths and 2 percent higher compared to a year ago.UK CONSTRUCTION OUTPUT in £ bn 140 Constant, 2005 prices CONSTRUCTION OUTPUT: 3-months to Aug 2012 Current prices Value Volume Volume 130 £ million, current 3M-o-3M 3M-o-Y 120 Public Housing 969 -4% -21% 110 Private Housing 4,003 -4% -12% Infrastructure 3,456 3% -18% 100 Public non-residential 2,813 -1% -22% 90 Industrial 900 1% 2% Commercial 5,693 -5% -14% 80 All Repair & Maint. 11,062 -3% -4% Total Construction 28,896 -2% -12% Annualised, last: 3-months to Aug 2012 Source; ONS Source: ONS
Construction activityLatest survey evidence confirms that UK CONSTRUCTION ACTIVITYtrading conditions in the UK construction PMI 65 Expansionsector remain challenging. The Markit/CIPSConstruction PMI recorded a reading of 6050.9 in October, up from 49.5 last month, 55indicating stable output. Output remains 50subdued, while there was a moderate 45reduction in new work and employment.Construction activity was somewhat 40stronger in the civil engineering sector in 35October, while residential construction was 30 Contractionparticularly weak. Construction companies’ 25remain subdued over businessexpectations in the year ahead, due to Source: Markitshortages of new business, lendingconstraints and lower budgets among COMPARISON OF CONSTRUCTION FORECASTSclients. Input price inflation accelerated Autumn 2012 £bnfurther from June’s recent low due to higher 2005 prices 120fuel and energy costs. 115Construction forecasts 110UK construction forecasters have once 105again downgraded forecasts for the 100industry, due to weaker prospects for the 95private sector to offset any cuts in public 90 CPAspending. Construction fell into recession 85 Experianfor a third time in five years during 2012. 80Experian now forecasts a 7.5 percent fall inconstruction this year, followed by a further2.5 percent fall in 2013, before seeing a Source: CPA, Experiansmall rebound of 0.7 percent in 2014. CPA CONSTRUCTION FORECAST - AUTUMN 2012 2012 Output Annual Percentage Change £ million, 2005 prices 2011 2012e 2013f 2014f 2015f 2016fThe CPA expects a fall of 6.3 percent this Private Housing 13,561 9.4 -3.0 10.0 2.0 4.0 6.0 Public Housing 3,552 1.9 -20.0 4.0 -18.0 -2.0 3.0year and a further fall of 1.4 percent in Public Non-housing 10,098 -6.7 -18.8 1.8 -11.0 -2.6 0.8 Infrastructure 11,308 8.7 -13.4 7.0 5.0 8.2 6.22013, before the industry returns to more Industrial 3,265 -9.7 0.6 5.1 1.7 3.7 5.0 Commercial 22,713 3.2 -5.7 4.7 -2.9 1.0 4.1solid growth in 2014. Key points from the Total New Work 64,497 2.6 -9.5 6.0 -2.4 2.5 4.5 Total R&M 35,752 2.5 0.0 3.6 0.3 2.2 3.3CPA’s latest forecast. Total Construction 100,248 2.6 -6.3 5.1 -1.4 2.4 4.1 Workload decline in 2012 and 2013 is driven by sharp cuts in funding for public housing, education and health, exacerbated by a slowdown in commercial offices and retail. Construction growth is forecasted to return in 2014 when a stronger economic recovery combined with an end to public sector cuts, are expected to increase workload. Despite attempts by the government to boost private residential construction, activity remains subdued. Public housing construction has been hit by government funding cuts and the hiatus between the end of the National Affordable Housing Programme last year and getting the replacement, Affordable Homes Programme (AHP) to start. As of July £1.76 billion funding has been allocated to housing associations, local authorities and house builders to provide affordable housing. However, the extent of the fall in capital investment for the Department for Communities and Local Government (DCLG) means that public housing construction is unlikely to rise before 2014. Public spending cuts are having a significant impact on public non-residential work where activity is forecasted to fall in key sectors such as education, defence, and healthcare. Capital budgets for the Department for Education is set to fall by 10 percent in 2012/13 and by 18 percent in 2013/14, and the work on the Building Schools for the Future programme will fall away. More positively, there is some £1.2 billion additional funding for free schools and initial capital investment to start the Priority Schools Building Programme. Commercial work slowed sharply in 2012 and a further decline is expected next year. Modest growth in the sector is only anticipated to return in 2014, before more rapid recovery is penciled in for 2015 and 2016, boosted by an acceleration of work on mixed-use commercial schemes, such as the £8 billion redevelopments of Nine Elms and Earls Court.
Despite subdued investment intentions by UK manufacturers, industrial output is forecast to rise in the years ahead, as a refocus in exports increases industrial demand. After four consecutive years of CPA FORECAST: INFRASTRUCTURE SECTOR growth, infrastructure work stalled Volume, £ million, 2005 prices this year, but prospects in the 16,000 Harbours Electricity Gas, Air & Comms Rail years ahead are brighter. Network 14,000 Roads Water and Sewerage Rail’s capital investment plans are 12,000 fixed until 2013/14 and work on 10,000 Crossrail and Thameslink 8,000 continues. However, over the next settlement period funding is 6,000 expected to fall by around £6 4,000 billion. On the roads side, funding 2,000 for the Highways Agency (HA) will - fall by 29 percent between 2011/12 and 2013/14 and construction is forecast to fall this year and next. From 2014, growth is forecasted to average 7.5 per year. Investment in water & sewerage is anticipated to decline until 2014/15. A return to growth is anticipated in 2014 with growth averaging 3 percent per year. Electricity related construction is predicted to benefit from investment in nuclear and wind & gas. However, due to a hiatus in the new nuclear programme and offshore wind, the majority of growth has been pushed back by 12-18 months. Decommissioning, worth £3 billion per year, continues to be the key driver of nuclear work. Offshore wind is expected to rise considerably once round three of the wind farm deployment begins. The government recently announced that 20 new gas power stations would be built by 2030. The key risks around the forecast remain on the downside, due to global and Eurozone economic uncertainty and the hiatus in investment in nuclear and renewables. More positively, there could be an additional boost for residential and infrastructure construction in the Government’s Autumn Statement on 5 December.Building material pricesThe construction material price index fell CONSTRUCTION MATERIAL INFLATION Y-o-Ymarginally by 0.1 percent on the month in 40%August, while annual inflation stagnated. 30%Fabricated structural steel was down 1percent in August and 4.6 percent lower 20%year-on-year. Similarly, concrete reinforcing 10%bars fell 0.9 percent during the month and 0%6.9 percent down on a year ago. Cement -10%prices were relatively unchanged during the Construction Material Price Indexmonth, but remained 6.8 percent up on a -20% Fabricated Structural Steel Concrete Reinforcing Barsyear ago. -30% Cement Wire Sawn Wood -40%Central London OfficesAccording to the CBRE, take-up of offices Source: BISspace in Central London in Q3 2012 was2.22 million sq ft, 16% less than in Q2 2012. CENTRAL LONDON DEVELOPMENT PIPELINEAll Central London markets saw below- million sq f t 14trend levels of take-up, but both the West Proposed Under Construction CompletedEnd and Docklands saw quarter-on-quarter 12increases. After four quarters of increases, 10availability in Central London declined by 5 8percent, the largest decrease in availabilitysince Q3 2010. The primary cause of the 6drop in availability was a large fall in the 4secondhand availability, especially in the 2West End. Some 1.12 million sq ft of newoffice space was completed in Q3 2012 0including The Shard, London’s tallestbuilding. A further 0.96 million sq ft is Sourced: CBREexpected to be delivered in Q4 2012, bringing the 2012 total to 2.68 million sq ft, an increase on the2011 total but significantly below the 10-year average completions.
Europe: A closer lookCzech RepublicConfidence in the Czech economy has The Czech economy is expected to end 2012 indeteriorated since 2010. GDP has posted its 7th recession, with GDP down 0.9 percent on 2011.quarter-on-quarter decline in Q2 2012, due to Only a modest recovery is forecast for next year,weak consumer spending. Construction has with the CNB predicting weak 0.2 percent growthbeen very weak since the beginning of 2011 in 2013 and 1.9 percent in 2014.CZECH ECONOMY CNB GDP FORECAST Annual 10 GDP 16% Consumer spending Government spending 8 12% Construction Output 6 8% 4 4% 2 0% 0 -4% -2 -8% -4 -12% IV/10 I/11 II III IV I/12 II III IV I/13 II III IV I/14 II 90% 70% 50% 30% interval spolehlivosti Source: CZSOAnnual consumer price inflation stood at 3.2 Construction activity has declined significantly inpercent in September, considerably above the 2 recent years, due to a fall in private sectorpercent target. The Czech Central Bank (CNB) confidence and public sector spending cuts. Inforecasts inflation to start edging down, ending the first nine months of 2012, construction output2012 at 2.8 percent and expecting it to drop decreased by 6.5 percent year-on-year.below the 2 percent-target in 2014.CNB INFLATION FORECAST Monetary CONSTRUCTION PRODUCTION po licy 7 horizon 2005=100 Index 3M average, Annualised annual % Buildings (annual change) 6 120 Civil engineering (annual change) 30 5 110 20 4 Inflation targ et band 100 10 3 90 0 2 1 80 -10 0 70 -20 -1 60 -30 IV/10 I/11 II III IV I/12 II III IV I/13 II III IV I/14 II 90% 70% 50% 30% conf idence interval Source: CZSOConstruction new orders fell throughout 2012, The Czech construction sector is forecast to seewith civil engineering seeing the worst falls. its fifth consecutive annual decline in 2013,Public budget cuts have led to a revision in the according to Euroconstruct. A small rebound is2020 Transport infrastructure strategy in January pencilled in for 2014 at the earliest.2012, postponing major projects. Non-residentialconstruction is being driven by demand for officeand logistics space.CONSTRUCTION NEW ORDERS CZECH REPUBLIC CONSTRUCTION OUTPUTValue, CZK m, New Orders - Value Annual % annualised Total - Annual change 2 0.6 0.8 Buildings - Annual change 1 Civil Engineering - Annual change 0250,000 150 -1 -2 -1.3 -3 -1.9200,000 100 -4 -5 -3.9 -6150,000 50 -7 -8 -6.8 -7.2100,000 0 50,000 -50 Total Construction Output 2011 Construction Output Forecast No n-residential: -1.3 €18.4bn 2012-14 per annum 0 -100 Residential: -2 Civil Engineering: --6 Source: CZSO Source; Euroconstruct, June 2012
On the back of weaker industry activity, No rise in construction prices is expected nearconstruction prices have decreased since 2010 term, in the absence of a significant turnaroundacross the majority of sectors. in construction industry performance.CONSTRUCTION WORKS PRICE INDEX CONSTRUCTION PRICE INDEX BY SECTOR Annual % Annual % 4.0 6.0% 3.5 5.0% 3.0 4.0% 2.5 2.0 3.0% 1.5 2.0% 1.0 1.0% 0.5 0.0% 0.0 -0.5 -1.0% -1.0 -2.0% Source: CZSO Source: CZSORussiaThe Russian economy has slowed in recent Assuming an average Urals oil price of US$100months, but will remain relatively stronger than per barrel, most forecasters predict the Russianmany other European countries unless there is a economy to expand by 3.5 to 4.5 percent persharp and prolonged fall in oil prices. The annum in the foreseeable future.consumer sector is still firm amid low officiallevels of unemployment and firm wage growth.RUSSIA ECONOMY: PRODUCTION AND CONSUMPTION GROWTH COMPARISON Annual % 3M Annual % avg 12 World 12 Russia China 8 10 Eurozone 4 8 0 6 -4 Industrial Output 4 -8 Retail Trade-12 2-16 0 -2 Source: GUS Sourced: IMFThe Urals oil price averaged US$113.5 per barrel Annual consumer price inflation has picked up toin September, up from US$102.7 in August. On 6.6 percent in September, due to food prices andthe back of this, the Rouble has strengthened an increase in tariffs. To stem inflation, themodestly to an average of 30.92 per US$ in Central Bank has hiked all policy rates by 25September from 32.29 in August. basis points. In contrast, slower building activity has led to a downward trend in building material inflation, which stood at 6 percent in August.OIL PRICES AND EXCHANGE RATES INFLATION US$/ barrel RUB/USD - Annual reverse axis Consumer Price Index 130 26 12 Building Material Index 120 10 28 110 8 30 100 6 90 32 80 4 34 70 2 Urals crude price 36 60 RUB/ USD Exchange rate 0 50 38 Source: Russia Central Bank Source: Rosstat
Despite turbulence in the Eurozone and overall In value terms, Russian construction output inglobal slowdown, the Russian construction the first nine months of 2012 was RUB 3,649industry continued to expand at a moderate pace billion, compared to RUB 2,762 billion last year.this year, driven mostly by projects with funding Construction new orders in the first nine monthssources in the public sector, while private entities of 2012 stood at RUB 2,992.2 billion, up fromare reluctant to commit funds in the currently RUB 2,734.4 billion last yearuncertain economic outlook. Growth slowed to anannual 2.9 percent in the January-Septembertime frame. . CONSTRUCTION ORDERS CONSTRUCTION OUTPUT 3-month averages Value of construction orders (RUB, bn) Backlog of orders (months) RUB, bn, current Annual 400 Value of Orders 4 Output at current prices 700 Y-o-Y 10 Backlog of orders (months) 350 3.5 8 600 6 300 3 500 4 250 2.5 2 400 200 2 0 300 -2 150 1.5 200 -4 100 1 -6 100 -8 50 0.5 0 -10 0 0 Source: Rosstat Source: Rosstat, PMRRegionally, the North West, Caucasus and Volga Construction growth is forecast to pick up to 9Federal Districts saw the strongest growth in the percent in 2013, from 4.1 percent in 2012,first nine months of this year. The dominant according to PMR, due to the RussianCentral Federal District saw output down 1.7 government’s investment in the country’spercent in the year to September. transport and energy network, as well as social infrastructure.REGIONAL CONSTRUCTION GROWTH RUSSIA CONSTRUCTION OUTPUT Annual 2010 RUB, billion Value (LHS) Percent 20.0 Annual change, real (RHS) 2011 7,000 20% 15.0 2012 Jan-Sep 6,000 15% 10.0 5,000 10% 4,000 5% 5.0 3,000 0% 0.0 2,000 -5% -5.0 1,000 -10%-10.0 0 -15% Source: Rosstat Source: Rosstat, PMRThe government is implementing initiatives to boost the construction industry. In August 2012 itapproved the Construction Road Map, aimed at improving the business environment. For example,the number of procedures needed to obtain a building permit is set out to be cut from the 51 to 15 by2015 and to 11 by 2018. The period needed for all mandatory processes is aimed to be reducedfrom the current 423 days to 130 days by 2015, and to 53 by 2018.
GermanyThe German economy coped well with the crisis The outlook should improve gradually in 2013,in 2008 and 2009, expanding strongly in both of as a more stable global and Eurozone economythe following years. Since mid-2011, however, support exports and investments. Nevertheless,confidence among German businesses and important major economies are still battlingconsumers has deteriorated. The German against recession in 2013, including France, Italyeconomy is expected to face a weak winter, as and Spain. German exports are therefore set toinvestment falls, factory orders decline and rise only moderately. Internally, the Germanconsumers reign in spending. economy will be helped in 2013 by rising wages and consumption growth. GERMAN FACTORY ORDERSGERMANY ECONOMIC CONFIDENCE Index Composite ECI Economic Conf idence Indicator Sectors 2005=100 Factory orders - all production industries Annual 3M-avg Average=100 Industry Investment goods 140 Services 50 130 40% Consumers Consumer goods 40 30% 120 Construction 120 30 20% 100 20 110 10% 10 80 0% 0 100 60 -10% -10 -20 90 -20% 40 -30 -30% 20 80 -40 -40% 0 -50 70 -50% Source: Destatis Source: Ecof inAnnual consumer price inflation stood at 2.1 Construction in 2010 and 2011 benefited frompercent in September, down slightly from 2.2 the economic stimulus programme, but thispercent in August. The dynamic development of support has been missing in 2012 and industryconsumer prices in the past few months has growth has slowed. This is being felt most keenlybeen due to fluctuating energy prices. Stripping in the civil engineering sector. The prospects forout energy, the inflation rate has been constant non-residential commercial construction are alsoat 1.4 percent since June 2012. Energy prices modest, but the residential segment remainswere up 7 percent in September year-on-year. strong with housing benefiting from investors flight to safety.CONSUMER PRICE INDEX BUILDING PERMITS Annual Number Value, EUR, bn 4 70,000 25 Non-residential 4 Residential 60,000 Value (EUR, bn) 3 20 3 50,000 2 15 40,000 2 30,000 1 10 1 20,000 5 0 10,000 -1 0 0 -1 Destatis 3-monhts averages Source: DestatisLeading indicators, i.e. building permits and new Construction output dropped sharply in the firstorders have still been trending positive in 2012. half of 2012, but has since performed stronger,The volume of building permits issued in the first which is expected to translate into full-yeareight months of 2012 stood at €47 billion, growth of around 0.3 percent year-on-year,compared to €43.7 billion last year. The picture is according to DB Research.similar for new orders, which are up 5 percent inthe year to August. Orders growth for residential(9 percent) and non-residential (6 percent)construction projects has outstripped those forcivil engineering (3 percent) in the year toAugust.