Introduction

A great degree of uncertainty remains over the next few years for both the construction industry and the economy in general with little progress on the negotiations to leave the European Union, following the hiatus caused by the recent General Election.

The Global outlook also looks volatile with grown in the majority of the world’s economies expected to remain modest for the duration of the forecast.

Market Outlook

The overall rate of growth in construction activity continued to reduce in 2016, with a limited further reduction forecast over the next two years, reinforcing a trend that started back in 2015.

However, construction activity continues to represent a significant portion of Gross Domestic Product and any changes in the volume of construction output can have a noticeable impact across the economy as a whole.

The biggest factor affecting growth levels is still perceived to be the availability of finance, despite continuing low interest rates, now forecast to only rise to 1.25% by 2021.

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, with 36% of contractors experiencing difficulty in securing site trades, significantly up from the 13% previously reported, with bricklayers (63%), carpenters (44%) and plasterers (33%) in particularly short supply.

The recent RICS Market Survey reports that Quantity Surveyors are generally anticipating workloads to increase over 2017, albeit to a lesser degree than previously forecast. Contractors also reported a fall in capacity utilisation with those working at / near capacity reducing by 2% to 29%, from a high of 52% in 2015.

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 fell by 0.7% in the fourth quarter of 2016 compared with the previous quarter but rose by 7.2% compared with the same quarter in 2015.

Over the next year tender prices are expected to remain very competitive because of limited opportunities across all sectors, and contractors actively seeking work to maintain turnover and retain capacity.

However, the forecast towards the end of the period indicates significantly higher to reflect anticipated wage pressure given the likely withdrawal from the Single Market and the Customs Union, with the subsequent restrictions in the movement of labour, and move by EU labour to seek more secure long term employment outside the UK.

The General Building Cost index rose by 1.2% in 1st quarter 2017 compared with the previous quarter and by 4.4% when compared to a year earlier.

Costs are expected to rise at an increasing rate over the next 3 years with input costs currently rising at the fastest rate since 2008, according to recent Government figures.

The Market Conditions Index fell by 1.6% in the fourth quarter of 2016 compared with the previous quarter but rose by 4.3% compared with the same quarter in 2015.

Materials prices rose by 1.9% in the 1st quarter 2017 and 5.5% when compared with the previous year. Individual material prices generally moved between -1.0% and +2.0% however fabricated steelwork, metal door  and windows and paint rose by 3%, electric water heaters by 4% and reinforcement bars by 8% over the quarter.

The fall in the value of sterling has an impact on both the cost of imported goods and the cost of raw material used by UK manufacturers, such as metals and plastics, which is now clearly being passed on with materials rising by over 4.0% in 2016

The Consumer Prices Index (the Government’s measure of Inflation) rose by 2.7% over the same period, significantly above the government’s target level of 2%, and it is currently anticipated to remain at or above 3% for the foreseeable future.

Manufacturing input prices fell by 0.6% in April 2017 compared with March 2017 but rose by 10.5% when compared with a year earlier. Output prices rose by 0.5% compared with the previous month and by 2.8% compared with April 2016.

Overall, the forecasts continue to fluctuate regularly as the picture on the withdrawal from the European Union, and the fallout from the recent General Election continue to evolve, making long term forecasting particularly difficult.

Construction Output Forecast

Over 2016 the total volume of construction output rose by 2% with new work output also rising by 2%.

Analysis of new work output showed increases of 4% for public sector housing, 1% for other public sector work, a 3% increase in private commercial work and a 17% fall in the private industrial sector.

It is now anticipated that total construction output will increase slightly in 2017 before returning to more modest growth in 2018 – 2019, before rising at between 2.0% – 3.0% per annum from 2020 to 2021.

Over the period of the forecast, new work output is expected to grow by less than 6%

Growth in repair and maintenance work is anticipated to be nominal over the period of the forecast.

The private sector continues to be a key driver for growth with the housing and commercial sectors accounting for over 60% of total input in 2016, although it is most likely to be affected by the uncertainty with further investment reduced or put on hold, particularly in the non-housing sectors.

Whilst growth is still forecast for the next 3 years it is now at a level more in line with the forecasts for the economy as a whole, reflecting the increased degree of uncertainty currently evident, particularly in Scotland where recent figures indicate weaker growth than the rest of the United Kingdom.

Given the result of the General election it has been assumed that relevant policy will not change radically and the  significant potential infrastructure investment by the public sector announced last year will proceed as planned although these will be by there nature long term projects with the impact not becoming apparent until towards the end of the current forecast.

It is also apparent that trading conditions for contractors are becoming more difficult with a significant increase in construction related compulsory liquidations reported in 2016.

To Summarise

In general, the optimistic view previously widespread now appears to be more fragmented with confidence levels slipping amongst Scottish business over the last six months when compared with those in England and Wales, given the evident reduction in enquiries and tendering opportunities since the turn of the year.

The second hung parliament in 7 years can only lead to further uncertainty with the Conservatives proceeding as a minority administration with the inevitable increased risk of challenge to policy decisions likely to impact on investors’ confidence in the short term.

Clearly there are challenging times ahead.

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