A great degree of uncertainty remains over the next few years for both the construction industry and the economy in general with little progress on the negotiations to leave the European Union, however the potential for a transition period is beginning to appear likely which would moderate the immediate impact of the withdrawal from the single market and customs union.
The Global outlook also remains volatile with grown in the majority of the world’s economies expected to remain modest for the duration of the forecast.
The overall rate of growth in construction activity has continued to reduce over the last 12 months into 2017, with a further reduction forecast over the next two years, reinforcing a trend that started back in 2015.
Financial constraints remain the biggest factor affecting growth levels, despite continuing low interest rates availability of bank finance appears the major issue, with cash flow and liquidity challenges also widespread throughout the industry.
According to the Office for National Statistics employment in the construction industry rose by 3% over the last year. However skill shortages also continue to be an issue across most professions and trades, with 27% of contractors experiencing difficulty in securing site trades, down from the 36% previously reported, with bricklayers (43%), carpenters (43%) and plasterers (54%) in particularly short supply.
The recent RICS Market Survey reports that Quantity Surveyors are generally anticipating workloads to increase over 2017/18, but to a significantly lesser degree than previously forecast with a knock on impact on profit level forecasts. However, Contractors also reported a large increase in capacity utilisation, with those working at / near capacity rising to 53%, from a low of 29% in the previous quarter2015.
The following forecasts are based on a middle of the road set of assumptions with regards to trade restrictions and access to labour. However, the figures could vary by +/- up to 5% over the period of the forecast if the outcome of the Brexit negotiations are more or less onerous.
The current movements in construction costs currently reported in the BCIS Quarterly Report are as follows: -
Tender prices rose by 2.1% in the first quarter of 2017 compared with the previous quarter and rose by 4.7% compared with the same quarter in 2016.
Over the next two years tender prices as a whole are expected to remain very competitive because of limited opportunities across all sectors. However this is likely to vary regionally with Scotland potentially performing above average as a result of a different focus within public sector construction procurement.
The forecast towards the end of the period indicates significantly higher tender price increases as there is a return to strengthening growth in both new build and refurbishment projects, anticipated wage pressure and increasing input prices no longer being absorbed.
The General Building Cost index rose by 0.3% in 2nd quarter 2017 compared with the previous quarter and by 3.7% when compared to a year earlier.
Costs are expected to rise at an increasing rate over the next 5 years with input costs rising significantly towards the end of the forecast period following withdrawal from the European Union as a result of the anticipated trade restrictions, depressed exchange rate and reduction in availability of labour.
The Market Conditions Index rose by 0.9% in the first quarter of 2017 compared with the previous quarter and rose by 0.4% compared with the same quarter in 2016.
Materials prices rose by 1.1% in the 2nd quarter 2017 and by 5.4% when compared with the previous year. Individual material prices generally moved between -1.0% and +2.0% however asphalt and imported plywood fell by 2%, whereas sawn wood, metal doors / windows and plastic pipes and fittings rose by 3% and metal sanitary ware increased by 4% over the quarter.
Significant increases in material prices over the first half of the year have been driven by the fall in the value of sterling and these are now clearly being passed to consumers through higher prices.
The Consumer Prices Index (the Government’s measure of Inflation) rose by 2.7% over the same period, above the government’s target level of 2%, and it is currently anticipated to remain around 3% per annum for the next few years.
Manufacturing input prices rose by 0.2% in July 2017 compared with June 2017 and rose by 5.5% when compared with a year earlier. Output prices rose by 0.1% compared with the previous month and by 2.4% compared with June 2016.
Overall, the forecasts continue to fluctuate regularly as views on the likely picture following the withdrawal from the European Union continue to slowly evolve, and the worldwide economic picture changes making long term forecasting particularly difficult.
The total volume of construction output fell by 1% in the first quarter of 2017 but remained unchanged when compared to the same quarter in 2016. New work output also fell by 1% but rose by 2% when compared to a year earlier.
Analysis of new work output over the last year showed increases of 14% for public sector housing, 5% for private housing, 3% for infrastructure 2% for private commercial work and falls of 7% for other public sector work and a 22% fall in the private industrial sector.
It is anticipated that total construction output will only increase slightly in 2017 before returning to more modest growth in 2018 - 2019, before rising at between 2.0% - 3.0% per annum from 2020 to 2021.
Over the period of the forecast, new work output is expected to grow by approximately 5%, significantly less than forecast 6 months ago.
Any growth in repair and maintenance work is only anticipated towards the end of the period of the forecast.
The forecasts assume that the private sector will be affected by reduced, or at best delayed, investment over the next few years given the unavoidable hiatus around whether projects should proceed or not unfolds during the EU withdrawal process.
It is seen as less likely that public sector projects will be affected, particularly those infrastructure and housing projects identified in the 2016 Autumn Statement and the current Scottish Government pipeline.
Short term rises in activity levels have been identified in the last quarter but this is not expected to be sustained with levels of Architect’s new commissions and Contractors new tender enquires now falling.
In addition, with some large projects nearing completion in Scotland the re-allocation of resources will become an issue with only limited opportunities now likely to be available for the foreseeable future.
A return to stronger output growth is forecast for 2020 and beyond on the premise that the new infrastructure projects, including HS2, proceed as planned and there is a return to growth in the private commercial and industrial sectors which have seen the biggest recent falls in activity levels.
The picture does fluctuate regionally with Scottish businesses appearing to be particularly badly affected when compared with those in England and Wales, given the slower rates of growth in the Scottish economy as a whole.
Recent forecasts and surveys indicate that confidence levels are slipping across the industry as a whole as the continued uncertainty over the Brexit Process and the eventual outcome continues, with optimism about short term employment and profit levels generally declining across all parts of the industry