Recent market surveys paint a subdued picture with the construction sector still lacking momentum with the economic consequences of the Covid-19 which has depressed demand over the last six months looking likely to continue in the short term at least.
Scottish construction output fell by around 18% in the last quarter which is a greater drop than the 7% recorded for the UK overall, although on the positive side both figures are significantly better than the 43% and 36% respectively reported in the second quarter during the height of the initial lockdown.

Market Outlook

Prior to the lockdown the overall rate of growth in construction activity continued to reduce over the last 12 months in line with the reduction on overall GDP growth to under 1.0% per annum.

Forecasts for GDP as a whole now indicate the bounce back which started in Q2 continuing into 2021 followed by increases of less than 3% over the next three years. This would suggest that the growth in total construction output could start to increase marginally or will at least remain static in the short term given the significance of the sector to the economy as a whole.

The latest RICS Market Survey reports that the an increasing number of Scottish Quantity Surveyors workload expectations have improved in the third quarter with 33% of responses generally anticipating workloads to increase by up to 5% over the next year, up from 17% in the previous quarter, and somewhat higher than the national figure of only 13%

Employment levels are expected to remain fairly stable, but profit margins will be reduced as Consultants and Contractors all try to maintain turnover.

The following forecasts are based on a middle of the road set of assumptions with regards to trade restrictions and access to labour and no second lockdown due to Covid-19. 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 (October 2020)

Tender Price Update

Over the next five years tender prices are forecast to rise by 14% overall.

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

Tender prices are now expected to fall during 2020 driven by the impact of the Covid-19 pandemic on the economy as a whole and resultant deferral of many construction projects, with new orders showing a decrease across all sectors, averaging 55% in the private sector and 15% for the public sector over the last quarter.

Tender prices are not expected to start rising until the middle of 2021 as contractors continue to absorb the additional cost of working under the Covid-19 guidelines until the requirements for social distancing are no longer required, possibly by the end of 2021.

Following the end of the Brexit transition period on 31 December 2020 should a trade deal with the European Union not be secured increased costs of tariffs are expected, when combined with increases in input prices lead to tender price rises over 4%.

The forecast for the following 3 years continues to indicate strong tender price increases driven by improved growth in most sectors, giving rises in excess of input costs.

Building costs are expected to continue to rise over the next 5 years, with increases around 3% per annum over the next five years. These increases will be predominantly driven by faster rising material prices and wage demands resulting from a reduced labour pool.

Materials prices rose by 0.3% in the last quarter but fell by 0.3% when compared with the previous year, average increases of around 2% per annum are currently forecast for the next 5 years. The main factors driving price increases include oil price rises, anticipated import tariffs and sterling exchange rate fluctuations.

Wage awards are expected to be negligible in 2020, rising to 2% for next year and falling back to 2.5% increases for the remainder of the forecast period.

Overall, the forecasts continue to fluctuate regularly both as a result of the Covid-19 pandemic and the fact that there is still a lack of clarity on the likely trade situation following the withdrawal from the European Union at the end of the transition period, with talks ongoing at present.

Construction Output Forecast

Total construction output fell by 36% in Q2 when compared with the previous quarter, but this was followed by a significant bounce back over the summer following the easing of the nationwide lockdown and resumption of non-essential works. Overall, it was 38% down from May 2019, with new work output following a very similar trend.

Annual comparisons of new work output over the quarter and the last year (including the lockdown) showed every sector decreasing

Average decline was between 20% and 40% but with a 61% decrease for public housing.

Over the period of the forecast, new work output is expected to bounce back strongly in 2021, initially lead by the infrastructure sector, assisted by most other sectors, but with output levels taking until mid-2023 to return to 2019 levels.

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

Source: BCIS (October 2020)

To Summarise

Given the closure of much of the industry during the Covid-19 related lockdown, and the slowing of the initial bounce back the results of recent surveys remain quite pessimistic, although less so in Scotland than the UK wide view.

The continuing impact of Covid-19 restrictions on operations and demand remain the main concerns of those within the industry with the desire for a clearer Government strategy needed to drive the recovery and when this is combined with the ongoing concerns over labour supply and material availability, overall market confidence in the short term remains close to a 10 year low.

Initiatives such as the Scottish Construction Leadership Forums detailed Covid-19 recovery plan for the Scottish construction Sector – ‘Rebuild Better’ should assist greatly in both the short and longer term in creating a more ‘productive, profitable, innovative, sustainable and socially responsible construction industry, offering quality jobs and work to a highly qualified and diverse workforce and a quality and life time value product to its customers.

Clearly challenges will remain into 2021, but with the developing Covid-19 vaccination plans we can hopefully look forward with more optimism than recently.

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