Construction activity in the housing market is typically regarded as a leading indicator of economic growth. Depending on the size and scale of the industry, housing construction can also have a significant impact on GDP growth. For example, our analysis of historic numbers shows that in 2004, household construction boosted US GDP by 50 basis points.
Figure 3Housing starts2 in US, UK and Eurozone3 Please note 2 Housing start is defined at the point where the foundation of a house is laid.
Figure 4Housing starts and GDP growth for selected economies
Figure 3 highlights the above points. Housing activity started plummeting four quarters ahead of the 2008 downturn. Specifically US housing starts dropped by almost 80% during the financial crisis. The UK recorded a 55% dip. The Eurozone however recorded only a modest drop. This was partly because the excess housing stock was concentrated in a few peripheral economies like Spain and Ireland, rather than the larger economies of Germany and France.
Figure 4 shows that in the aftermath of the financial crisis in 2010, housing activity started growing again at a moderate pace. Meanwhile, GDP bounced back much more aggressively than our leading indicator would suggest.
This was because of the change in the underlying sources of growth in the economy from one fuelled by household construction (and consumption) to one supported by government consumption.
In the UK for example, government spending increased from around 40% of GDP in 2005 to 47% in 2009.
However, recent data suggests that government spending as a proportion of total spending in the economy is reverting back to historic level . The IMF for example estimates US government spending will gradually revert back to its pre-crisis level of 40% of GDP by 2017.
At the same time, housing construction continues to grow at a modest rate and is expected to do so as prices recover.
Both of these facts signal that we are seeing a resumption of consumption led growth, which is expected to lend support to the recovery in the future. Our Global Consumer Index (summarised on page 4) also supports this view which has been growing at its fastest rate since its inception a year ago.