The UK economy grew by only about 0.20 per cent in the fourth quarter of 2018, maintaining recent weak rates by historical standards.
Clearly, significant uncertainty still exists over the years ahead for both the construction industry and the general economy, with little more clarity available on how the exit process from the European Union will unfold.
The overall rate of growth in construction activity has continued to reduce over the last 12 months in line with the reduction on overall GDP growth, with further reductions forecast for at least the next year or two, continuing the trend that started back in 2015.
However, with forecasts for GDP now looking more positive this could suggest that the growth in total construction output will start to increase, or at least remain static for a period.
According to the Office for National Statistics, employment in the construction industry rose by 1% 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 40% of contractors were experiencing difficulty in securing site trades, up from the 34% previously reported, with bricklayers (70%), carpenters (58%) and plasterers (75%) in particularly short supply.
The latest RICS Market Survey reports that only 24% of the Quantity Surveyors responding are generally anticipating workloads to increase over the next year, 9% less than previously recorded. However, the picture in Scotland remains more positive with both workloads and employment expected to improve over the next 12 months.
Contractors reported a decrease in capacity utilisation, with those working at / near capacity significantly down to 14%, from 57% in the previous quarter.
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 forecast movements in construction costs currently shown in the BCIS Quarterly Report are as follows: –
Tender Price Update
Tender prices are expected to rise at a moderate over the next 24 months following a return to marginal growth during the last quarter of 2018. This is backed up by views expressed in the recent BCIS Contractors survey which indicated an expectation of rising tender prices over the next six months.
The forecast for the remaining 3 years of the forecast period indicates gradually strengthening tender price increases as there is a return to growth in most sectors, coupled with upward pressure on site rates and input costs, for both material and labour elements giving rises of up to 6% per annum.
Building costs are expected to continue to rise over the next 5 years, with increases of 3% per annum for the next two years, increasing to 5% per annum over the following 3 years. This increase will be predominantly driven by faster rising material prices and wage demands resulting from improved demand.
Materials prices rose by 0.4% in the last quarter and by 4% when compared with the previous year, increases of 3.5% per annum are currently forecast for the next 5 years.
The recent increases being attributed, at least in part, to the falling value of Sterling against the Dollar and Euro. It is forecast that exchange rates will remain depressed until the end of the anticipated ‘transitional period’, improving thereafter with the consequential benefit for the cost of imported materials.
Individual material prices generally moved between -1.0% and +1.0%, however taps, valves, insulation material and aqueous paint rose by 2%
In contract, some materials have experienced recent price decreases with imported plywood fell by 3% and steel rebar by 7.0% over the last quarter.
Manufacturing input prices rose by 4.6% when compared with a year earlier. Output prices rose by 2.4% over the last year, with manufacturers now absorbing a smaller proportion of the increase in raw material prices.
Wage awards are expected to be agreed at 3% per annum this year, rising to between 5% and 6% for the remainder of the forecast period.
Overall, the forecasts continue to fluctuate regularly as there has been little further clarity on the likely trade situation following the withdrawal from the European Union over the past 3 months.
Construction Output Forecast
Analysis of new work output over the last quarter showed an overall increase of 1%. Increases were seen in all sectors with the exceptions of the private housing sector which remained static and private industrial work which fell by 2%.
Annual comparisons of new work output over the last year showed some sectors increasing between 2% and 3% but with a 7% increase for infrastructure. Output fell in the other sectors, ranging from 2% for the public non-housing sector to 4% in the private commercial sector.
Over the period of the forecast, new work output is expected to grow by approximately 0.50% more than forecast 3 months ago, with significantly higher growth in 2022 & 2023.
The forecast movements in construction output currently identified in the BCIS Quarterly Report are as follows: –
Short term trading conditions in the Construction Industry look set to remain challenging with a significant rise in the number of firms in Scotland in ‘critical distress’ in the first quarter of this year up over 500 percent on the previously identified total in 2018 according to insolvency specialist Begbies Traynor’s recent survey.
The report shows that 33 Scottish construction companies were in critical distress in the first quarter, up from only five in the opening three months of last year.
There was also a 136% year-on-year rise in the total number of Scottish companies in this type of advanced distress during the first quarter – a much sharper increase than the 17% rise for the UK as a whole.
Clearly market conditions are remaining challenging so far in 2019 given the lack of concrete progress with the eventual outcome of the Brexit process, with real improvements only likely to seen towards the end of 2021 and beyond.