Introduction

The UK economy grew by only about 0.50 per cent in the first quarter of 2019 but shrank marginally in the second quarter prompting fears of a recession, mirroring figures in other European economies.

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.

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, 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: –

Source: BCIS (September 2019)

Tender Price Update

Over the next five years tender prices are forecast to rise by 27% overall.

The All-in Tender Price index is expected to rise at a steady rate over the next 18 months following a return to growth during the first quarter of 2019. 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 following 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 over 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 three years, increasing to 5% per annum over the following 2 years. This increase will be predominantly driven by faster rising material prices and wage demands resulting from improved demand.

Materials prices rose by 0.7% in the last quarter and by 2.5% when compared with the previous year, increases of around 3.5% per annum are currently forecast for the next 5 years.

Individual material prices generally moved between -1.0% and +2.0%, however metal sanitary and flexible pipes / fittings rose by 3%, insulation materials by 5% and taps / valves by 6%.

In contract, some materials have experienced recent price decreases with imported sawn or planed wood by 3% and non-aqueous paint by 5% over the last quarter.

Manufacturing input prices rose by 3.1% when compared with a year earlier. Output prices rose by 2.0% 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 in 2019 & 2020, rising to between 4% and 5% 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 at the end of October.

Construction Output Forecast

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

Analysis of new work output over the last quarter showed an overall decrease of 1% in output. Decreases ranging from 2% to 11% were seen in all sectors with the exceptions of the public housing sector which rose by 13% and private commercial work by 2%.

Annual comparisons of new work output over the last year showed most sectors increasing apart from the private commercial sector which fell by 5% and the 6% in the private industrial sector. Average growth was between 2% and 4% but with a 12% increase for infrastructure and 29% for public housing.

In terms of orders, the total value of construction orders fell by 13% in the last quarter and by 5% over the last 12 months, clearly indicating the short-term issues facing the construction industry.

Over the period of the forecast, new work output is expected to grow by approximately 0.5% 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: –

Source: BCIS (September 2019)

To Summarise

Expectations for 2020 and beyond would appear to be improving, the main concerns now being lack of capacity and ongoing financial constraints being the most significant barriers to improved levels of 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 six-year low, due in the main to the continuing lack of resolution to the Brexit process.

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