Recent data continues to show a gradual improvement in the short term economic outlook however the medium and longer term remain uncertain with continuing uncertainty over the outcome of the ongoing Brexit negotiations.
The Global outlook is now seen as being a more mixed picture with increased growth being experienced in the United States and to a lesser degree across the rest of the world while growth in the UK is expected to remain modest at best for the duration of the forecast.
The overall rate of growth in construction activity has continued to reduce over the last 12 months, with a further reduction forecast for at least the next year or two, continuing the trend that started back in 2015.
Financial constraints, planning delays and labour shortages continue represent the biggest factors affecting growth levels, inclement weather being specifically highlighted as a short-term impact on development over the last few months
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, the Construction Products Association (CPA) recently reported that 31% of contractors were experiencing difficulty in securing site trades, up from the 22% previously reported, with bricklayers (80%), carpenters (76%) and plasterers (56%) in particularly short supply.
The recent RICS Market Survey reports that less than half of the Quantity Surveyors responding are generally anticipating workloads to increase during 2018, a marginally lower degree than previously recorded. However, the picture in Scotland was more positive with both workloads and employment expected to improve in 2018.
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 forecast movements in construction costs currently shown in the BCIS Quarterly Report are as follows: –
Source: BCIS (June 2018)
Tender Price Update
Tender prices are expected fall for most of 2018, even though there was a small increase at the end of 2017. This conflicts with a recent BCIS Contractors survey which indicated an expectation of rising tender prices over the first half of the year.
Following a dip in 2018 the forecast for the remainder of the forecast period indicates gradually strengthening tender price increases as there is a return to growth in most sectors, coupled with increasing wage pressure and rising input prices resulting from the reduced availability of labour.
Building costs are expected to continue to rise over the next 5 years, albeit at a slower rate than tender prices 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 1.4% in the last quarter and by 4.8% when compared with the previous year. The falling value of Sterling against the Dollar and Euro is a major factor with a proportion of the rising cost of imported materials is being passed on in price increases and no longer absorbed by suppliers to maintain turnover.
Individual material prices generally moved between 0.0% and +2.0% however steel reinforcement rose by 8.0%, imported plywood, plastic pipes (flexible) and water-based paint by 3.0%, with ironmongery falling by 1.0% over the quarter.
Raw materials have also experienced recent price increases with basic steel prices up by 10% and copper 11% over the last year.
Manufacturing input prices rose by 3.1% when compared with a year earlier. Output prices rose by 2.4% over the last year.
Wage awards are expected to be agreed at 3% per annum for the next 3 years, rising to 5% by the end of the forecast period.
Overall, the forecasts continue to fluctuate regularly as there is still a significant lack of clarity on the likely trade situation following the withdrawal from the European Union, and the subsequent uncertainty in both the construction and property sector and the economy as a whole continue to make long term forecasting particularly difficult.
Construction Output Forecast
Analysis of new work output over the last quarter only showed an increase of 2% for private industrial sector. Output reduced in all other sectors, with falls of 2-3% for private housing, infrastructure and private commercial sectors, 6% for other public-sector work and 9% for the public housing sector.
Annual comparisons of new work output over the last year showed increases of 6% for private housing and private industrial sectors. Output fell in the other sectors, ranging from 5% for infrastructure to 14% in the public non-housing sector.
Over the period of the forecast, new work output is expected to grow by approximately 1% less than forecast 3 months ago.
The forecast movements in construction output currently identified in the BCIS Quarterly Report are as follows: –
The impact of the current uncertainly will be most evident in the private commercial sector, as evidenced by the recent turmoil in the high street retail 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 modest 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 but there remains the likelihood of a further sharp fall in the private commercial and industrial sectors which have seen the biggest recent falls in activity levels.
Anticipated restrictions on the movement of labour 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.
Recent events paint a very mixed picture across the Construction and Property Sector with several companies reporting positive annual results at the same time as an increasing number of company administrations and liquidations being reported in Scotland.
Trading conditions now look set to improve in the medium term but remain difficult in the short term.