Figures fuel fears for industry already in recession as cuts in public spending take effect
Experts warned on Monday that the construction industry could sink deeper into recession as the number of companies unable to pay their debts rose by nearly a fifth in the last quarter, the first rise in two years.
Insolvencies in the construction sector climbed by 19% to 948 in the first three months of the year from 796 in the fourth quarter of last year, according to the accountancy firm Wilkins Kennedy.
It is the first quarterly rise in insolvencies since early 2009 and has stoked fears of another prolonged downturn for the sector. The figures show that the number of construction companies going bust had fallen steadily every quarter since the 1,209 insolvencies at the start of 2009, when Britain was mired in recession.
Construction was a key industry driving growth during the boom years up to 2007, along with financial services. While banks and other City firms have recovered strongly over the last two years, construction firms have continued to shed jobs and report low levels of business activity. Although the overall economy is growing, construction shrank in the last two quarters, according to government figures.
A monthly survey for May out on Thursday is expected to show a slight recovery in the sector?s health after property companies reported strong demand for office building in London and the south-east.
The CIPS/Markit survey of construction company purchasing managers dropped to 53.3 points in April, from 56.4 in March, and closer to the 50-point mark that separates expansion from contraction.
The construction industry had been kept afloat by big public-sector projects but the government is now cutting back sharply as part of its austerity measures.
Wilkins Kennedy said the cancellation of public sector building programmes such as Building Schools for the Future, has driven this rise in the number of construction firms going bust.
Anthony Cork, director at Wilkins Kennedy, said: ?The government has slashed capital spending on infrastructure across the board in order to plug the deficit and that has pushed the construction sector into a double dip. Fiscal stimulus at the start of the recession had included substantial infrastructure projects that keep the construction sector?s head above water. But that support is now being withdrawn.
?The question now is how quickly private-sector construction work will be able to pick up the slack left by the public sector. So far this has not happened.?
Among those that have fallen into administration in recent months are the property repair and maintenance group Rok; Carvill Group, one of Northern Ireland?s leading construction companies; Coventry groundworks contractor CJ? Haughey; John Laing Partnership, the former social housing unit spun off from John Laing Group in 2002; and social housing group Connaught last September.
Experts estimate that public-sector spending on construction represents about 40% of the industry?s turnover. The government is committed to halving this, slashing more than ?90bn of capital spending between now and 2014. Research from the construction data group Barbour ABI reveals that the value of contracts awarded for construction projects fell to just ?21bn in the year to May 2011, down from ?34.6bn on the previous year.
While the banks failed to meet their lending targets in the first quarter, ? lending to small firms fell more than ?2bn short of targets set by the Treasury as part of the Project Merlin deal struck in February ? it appears that the situation has improved more recently.
At the same time, there are signs that lending to small and medium-sized companies has improved in the second quarter, albeit with credit costs remaining high, according to the manufacturers? lobby the EEF. A survey of almost 500 companies by the EEF about 18 months into the recovery showed just as many small companies reported an increase in the availability of new lines of borrowing over the past two months as reported a decrease. This compared with a balance of -11% in the previous quarter.
There was a similar improvement among mid-sized companies. For existing credit facilities the balance of companies reporting decreased availability dropped from 11% to 7% among manufacturers.
However, rising costs remain a challenge. While fewer companies reported rising rates on existing loans, a balance of 22% reported an increase in the overall cost of credit over the past two months. On new lines of borrowing a balance of 28% reported an increase in the overall cost.
Lee Hopley, EEF chief economist, said: ?For the first time since the recession ended, manufacturers are reporting improving access to finance. Hopefully, this will translate into better news on new lending in the coming months. But availability is only part of the story and we also need to see costs coming down.?
She added: ?Ensuring companies have access to the finance needed to invest and grow is critical for the recovery. We need to see a sustained improvement before concluding that the actions taken by banks and government are bearing fruit and that no further measures are required.?
Julia Kollewe
guardian.co.uk ? Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds
http://www.guardian.co.uk/business/2011/may/31/construction-industry-danger-recession
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