Introduction

UK construction growth slowed to its weakest pace in six months in September, with the confidence of firms in the sector dampened by political uncertainty and investor concerns over Brexit, a recent survey shows. The Chartered Institute of Procurement & Supply’s purchasing managers’ index for the UK construction sector, which measures activity, fell from 52.9 in August to 52.1 last month on a seasonally adjusted basis. While above the level of 50 deemed to separate expansion from contraction, the September reading signals only modest growth.

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.

Market confidence, financial constraints, planning delays and restrictive regulations represent the biggest factors affecting growth levels. The shortage of skilled labour bot site based and throughout the professions also continues to pose a challenge for businesses.

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 29% of contractors were experiencing difficulty in securing site trades, down from the 31% previously reported, with bricklayers (63%), carpenters (89%) and plasterers (75%) in particularly short supply.

The recent RICS Market Survey reports that only 41% of the Quantity Surveyors responding are generally anticipating workloads to increase over the next year, 5% 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 an increase in capacity utilisation, with those working at / near capacity up to 58%, from 45% 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 2018)

Tender Price Update

Tender prices are expected to rise slightly over the next 12 months following a dip of approximately 2.5% in the first 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 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 1.1% 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 together with upward pressure on oil and steel prices resulting from various nations and suppliers reducing production to tackle overcapacity and increase prices through reduced supply. It is clear that a rising 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 -1.0% and +2.0% however softwood joinery rose by 11%, structural steel by 12% and steel reinforcement rose by 28.0% over the last year.

In contract, some raw materials have experienced recent price decreases increases copper and lead falling by 3.0% over the last quarter.

Manufacturing input prices rose by 5.9% when compared with a year earlier. Output prices rose by 2.2% over the last year.

Wage awards are expected to be agreed at 3% per annum for the next 2 years, rising to 5% 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 increase of 1% for private commercial, 3% for infrastructure, 6% for private industrial sector and 10% for public housing. Output reduced in all other sectors, with falls of 2% for private housing and 8% for other public-sector work.

Annual comparisons of new work output over the last year showed most sectors increasing between 3% and 6% but with an 18% increase for the private industrial sector. Output fell in the other sectors, ranging from 4% for the private commercial sector to 19% in the public non-housing sector.

Over the period of the forecast, new work output is expected to grow by approximately 0.5% less than forecast 3 months ago.

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

Source: BCIS (September 2018)

It would appear likely that there will be a significant amount of reduced or delayed investment by the private sector as the decisions over whether or not to invest are put on hold pending clarity on the economic position post Brexit.

It is seen as less likely that public sector projects will be affected, particularly those infrastructure and housing projects already identified by the UK and Scottish Governments.

A return to modest output growth is still forecast for 2019 and picking up beyond 2020 on the premise that the new infrastructure projects, particularly in the electricity, road and rail sectors proceed as planned but there remains the possibility of further falls in the private housing, commercial and industrial sectors.

To Summarise 

Workload growth is now declining across all regions of the UK but most pronounced in the Midlands and East Anglia, led by the first decline in industrial activity since the last recession and a general slowing in the growth of infrastructure spending over the country as a whole.

The more uncertain outlook for the economy as a whole has led to a less optimistic assessment for the Property and Construction sector over the year ahead.

Clearly market conditions will remain challenging in 2019 irrespective of the outcome of the Brexit negotiations with improvements only being seen towards the end of next year and beyond.

 

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