Introduction

The UK economy grew by only about 0.40 per cent in the third quarter of 2019, following a small reduction in the second quarter easing previous fears of a recession.

Clearly, significant uncertainty still exists over the next couple of years for both the construction industry and the general economy, with the transition period to our final exit from the European Union now underway.

Market Outlook

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 to under 1.5% per annum.

With forecasts for GDP now indicating increases of less than 2% over the next three years this could lead to the expectation that the growth in total construction output could start to increase marginally or will at least remain static in the short term.

According to the Office for National Statistics, employment in the construction industry fell by 3% over the last year. It is evident that skill shortages also continue to be an issue across most professions and trades, the Construction Products Association (CPA) recently reported that 50% of contractors were experiencing difficulty in securing site trades, down from the 57% previously reported, with bricklayers (57%), carpenters (78%) and plasterers (66%) in particularly short supply.

The latest RICS Market Survey reports that the majority of Quantity Surveyors workload increased in the third quarter and the picture remains relatively positive with 38% of the Quantity Surveyors responding are generally anticipating workloads to increase over the next year, albeit 11% less than previously recorded.

The picture in Scotland remains more positive with both workloads and employment expected to improve over the next 12 months.

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: –

Source: BCIS (January 2020)

Tender Price Update

Over the next five years tender prices are forecast to rise by 26% overall.

The All-in Tender Price index is expected to rise at an increasing rate over the next 12 to 18 months.

This is primarily due to recent increases in input prices and the modest growth in new work output caused by the continued uncertainty in the construction sector and economy in general over the Brexit negotiations.

The forecast for the following 3 years indicates strong tender price increases driven by improved growth in most sectors, giving rises over 5% per annum.

Building costs are expected to continue to rise over the next 5 years, with increases of 3% per annum for the next three years, increasing to 4% per annum over the following 2 years. This increase will be predominantly driven by faster rising material prices and wage demands resulting from a reduced labour pool.

Materials prices remained unchanged in the last quarter but rose by 1.4% when compared with the previous year, average increases of around 4% per annum are currently forecast for the next 5 years.

Individual material prices generally moved between -1.0% and +1.0%, however metal sanitary and flexible pipes / fittings rose by 3% and screws by 5%.

In contract, some materials have experienced recent price decreases with reinforcing bars falling by 2%, imported sawn or planed wood by 4% and plywood by 10% over the last quarter.

Manufacturing input prices fell by 0.3% when compared with a year earlier. Output prices fell by 0.1% over the last year, with reducing levels of demand being mainly responsible.

Wage awards are expected to be agreed at 3% per annum in 2020, rising to 4% for the next two years and falling back to 3% increases for the remainder of the forecast period.

Overall, the forecasts continue to fluctuate regularly as there is still little further clarity on the likely trade situation following the withdrawal from the European Union and the ongoing transition period.

Construction Output Forecast

Total construction output rose by 1% when compared with the previous quarter and by 2% over the last year.

Analysis of new work output over the last quarter showed an overall increase of 2% in output. Increases ranging from 1% to 5% were seen in all sectors except for the public housing sector which fell by 3%.

Annual comparisons of new work output over the last year showed most sectors increasing apart from the public non housing sector which fell by 4%.

Average growth was between 3% and 7% but with a 12% increase for public housing.

In terms of orders, the total value of construction orders remained unchanged in the last quarter and by 7% over the last 12 months, clearly indicating the continuing short-term uncertainty facing the construction industry.

Over the period of the forecast, new work output is expected to grow by strongly, initially lead by the infrastructure sector, assisted by most other sectors, with recovery in the private commercial sector from 2022.

The forecast movements in construction output currently identified in the BCIS Quarterly Report are as follows: –


Source: BCIS (January 2020)

To Summarise

There is still a great deal of uncertainty over the terms that will be agreed when the United Kingdom finally leaves the European Union at the end of this year, with such a large number of issues to be resolved in a relatively short period of time given how long it has taken to get to this point.

Expectations beyond 2020 would appear to be improving, the main concerns being lack of capacity and ongoing financial constraints in the private sector being the most significant barriers to increasing building activity.

However, in the short-term, trading conditions in the Construction Industry look set to remain challenging as market confidence indicators remain near a now seven-year low and projects continue to be delayed to await greater certainty on the final Brexit deal.

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