Introduction

Recent data has shown a marginal improvement in the short term economic outlook however the medium and longer term remain uncertain. With continuing concerns over the impact of the ongoing Brexit negotiations.

The Global outlook is now seen as being more positive with increased growth being experienced across the rest of the world while growth in the UK is expected to remain modest at best for the duration of the forecast.

Market Outlook

The overall rate of growth in construction activity has continued to reduce over the last 12 months, with the largest single month reduction since 2012 experienced in January. A further reduction is forecast for at least the next year, continuing the trend that started back in 2015.

Financial constraints, labour shortages and planning delays represent the biggest factors affecting growth levels, with more onerous conditions being placed on firms by financial institutions reflecting more cautious approach in the face of current economic conditions generally.

According to the Office for National Statistics employment in the construction industry rose by 2% over the last year. However skill shortages also continue to be an issue across most professions and trades, the Construction Products Association (CPA) recently reported that 22% of contractors were experiencing difficulty in securing site trades, down from the 44% previously reported, with bricklayers (67%), carpenters (50%) and plasterers (29%) in particularly short supply.

The recent RICS Market Survey reports that Quantity Surveyors are generally anticipating workloads to increase during 2018, but to a marginally higher degree than previously forecast. However, Contractors reported a fall in capacity utilisation, with those working at / near capacity down to 45%, from 62% in the previous quarter and an expectation of lower profit levels.

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% per annum over the period of the forecast if the outcome of the Brexit negotiations are more or less onerous.

Summary of Forecast

The current movements in construction costs currently reported in the BCIS Quarterly Report are as follows: –

Tender Price Update

Tender prices as a whole are expected fall in 2018 as the uncertainty on Brexit negotiations continues together with more limited opportunities across all sectors.

The forecast for the remainder of the forecast period indicates strengthening tender price increases as there is a return to growth in most sectors and with anticipated wage pressure and increasing input prices resulting from the reduced availability of labour.

Building costs are expected to continue to rise over the next 5 years with input costs rising to a greater degree 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.

Materials prices rose by 1.5% in the last quarter and by 5.3% when compared with the previous year. The falling value of Sterling against the Dollar and Euro suggests that a proportion of the rising cost of imported materials is being passed on in price increases.

Individual material prices generally moved between -1.0% and +2.0% however steel reinforcement rose by 6.3%, imported plywood by 4.7%, fabricated steelwork by 3.6% and insulation by 3.4% over the quarter.

High growth rates seen prior to the recession in some of the emerging economies are not currently anticipated to return within the next few years which will reduce the likelihood of any significant upward pressure on material prices.

Manufacturing input prices rose by 3.1% when compared with a year earlier. Output prices rose by 2.2% over the last year.

Overall, the forecasts continue to fluctuate regularly as views on the likely picture following the withdrawal from the European Union continue to change, and the volatile worldwide economic picture makes long term forecasting particularly difficult.

Construction Output Forecast 

Analysis of new work output over the last quarter showed increases of 5% for private housing, and 1% for infrastructure. Output reduced in all other sectors, with falls of 1% for public sector housing, 3% for other public sector work and private industrial and 4% for the private commercial sector.

Annual comparisons of new work output over the last year showed increases of 4% for public sector housing, 9% for private housing and 4% for infrastructure. Output fell by 4% for private industrial sector, 3% for commercial work and 10% for other public sector work.

Over the period of the forecast, new work output is expected to grow by approximately 2% more than forecast 3 months ago.

The impact of the current uncertainly will be most evident in the private commercial sector but it is seen as less likely that public sector projects will be affected, particularly those infrastructure and housing projects identified in the 2018 Spring Statement and the current Scottish Government pipeline.

A return to stronger output growth is forecast for 2019 and beyond on the premise that the new infrastructure projects, particularly in the electricity, road and rail sectors 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 forecasts assume that there will be restrictions on the movement of labour at the end of the recently agreed two year ‘transitional period’ which will have as marked impact on the construction sector with the withdrawal of European Labour and consequential upward pressure on wage rates resulting from the reduced labour pool.

To Summarise

Recent forecasts and surveys indicate that confidence levels remain depressed across the industry as a whole, with both output and tender prices set to fall this year as uncertainty over Brexit negotiations continue to affect investment decisions.

2018 looks set to remain challenging but with the likelihood of a return to full recession now thought unlikely.

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