The EU referendum result has had a significant impact on economic prospects and business sentiment both in Scotland and the UK as a whole. It is widely viewed that investment plans will be negatively impacted as a result of the likely changes in future trading arrangements.
Six months on from the vote there remains a high degree of uncertainty with forecasts generally being downgraded for the next couple of years.
The overall rate of growth in construction activity continues to reduce, reinforcing a trend that started back in 2015 which is now being seen across all sectors, with the private commercial and industrial sectors being hardest hit by delayed investment.
Large public sector infrastructure projects supported the strong growth seen in 2014 and into 2015 with the rate naturally slowing in 2016 and these projects near completion.
The biggest factors affecting growth levels are still perceived to be the availability of finance and skill shortages across the majority of professions and trades.
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% over the period of the forecast if the outcome of the Brexit negotiations are more or less onerous.
Summary of Forecast
The current movements in construction costs currently reported in the BCIS Quarterly Report are as follows: –
Tender Price Update
Tender prices Rose by 5.9% in the second quarter of 2016 compared with the previous quarter and by 3.2% compared with the same quarter in 2015.
Annual tender price rises had been on a downward trend since the peak in mid-2014. However, this increase on the previous forecast goes against this, possibly as a result of a lower than average sample being available to the BCIS and the data still being pre the EU referendum.
However, following the EU Referendum, tender prices are now expected to start to fall in the later part of 2016, as contractors react to marginal growth in output this year and falling demand in 2017.
Over the duration of the current forecast tender prices are now expected to only increase by less than 10%, compared with up to 25% forecast at the start of 2016 in our Spring Market Commentary.
The General Building Cost index rose by 1.2% in 3rd quarter 2016 compared with the previous quarter and by 1.6% when compared to a year earlier.
The Market Conditions Index rose by 5.3% in the second quarter of 2016 compared with the previous quarter and by 2.6% compared with the same quarter in 2015.
Materials prices rose by 1.6% in both the year to 3rd quarter 2016 and when compared with the previous quarter, although there were some exceptions to this trend, including ironmongery falling by 3% and fabricated steel which saw a 6% increase.
General Inflation rose by 0.9% over the same period, well below the government’s target level of 2%, a figure which it is currently anticipated will be exceeded during the latter part of 2017.
The fall in the value of Sterling will lead to higher construction costs, both in terms of imported materials which represent over 10% of total output and also the rise in cost of imported raw materials. Given the 15 – 20% drop in the value ofSterlingit is estimated that this alone could lead to an increase in construction costs of over 1%, although this may be offset by buyers switching to domestic products and suppliers holding their prices to maintain services.
The exchange rate fall may also have an impact on labour costs with working in the UK becoming less attractive to overseas workers.
Construction Output Forecast
It is anticipated that total construction output will fall in 2016 and 2017 before returning to modest growth in 2018, before rising at between 2.0% – 3.0% per annum from 2018 to 2019.
This represents a drop of approximately 1.5% per annum on the previous forecast however this was based on predominantly pre EU referendum data.
Over the period of the forecast, new work output is expected to grow by less than 5%
Growth in repair and maintenance work is anticipated to be nominal over the period of the forecast.
Our recent market experience reflects the continued uncertainty following the referendum, as rising tender prices and difficulty in securing skilled labour both remain evident across Scotland.
Looking ahead, it’s shaping up to be a tougher 12 months for the construction sector with the economic outlook appearing less favourable than in recent years, business optimism continuing to fall and the potential for interest rates to increase.