A high degree of uncertainty remains over the terms that will be agreed when the United Kingdom leaves the European Union, however recent indications from the Government make it significantly more likely that the UK will withdraw from both the Single Market and Customs Union.

The formal notification of Article 50 has at least put a definitive timescale on the exit negotiations.

Market Outlook

The overall rate of growth in construction activity continues to reduce, with a 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 impact across the economy.

The biggest factor affecting growth levels are still perceived to be the availability of finance, despite continuing low interest rates, now forecast to only rise to 1.0% by 2020.

Skill shortages also continue to be an issue across most professions and trades, albeit to a lesser degree at present than previous forecasts with 13% of contractors experiencing difficulty in securing site trades, down from 17% previously reported.

However, the recent RICS Market Survey reports that Quantity Surveyors are generally anticipating workloads to increase over 2017 and Contractors having an increase in available capacity.

Outwith the UK, the Eurozone still holds the potential for many downside risks and the majority of other major world economies saw growth slow recently with little expectation of a return to the previous high levels of growth seen prior to the last recession for the foreseeable future.

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 0.3% in the third quarter of 2016 compared with the previous quarter but rose by 5.9% compared with the same quarter in 2015.

Over the next 2 years’ tender prices are expected to remain competitive because of low growth in output, particularly in the private non-housing sector where a decline in output is anticipated.

However, the forecast towards the end of the period has been revised upwards from the previous report to reflect anticipated wage pressure given the likely restrictions in the movement of labour, and move by EU labour to seek more secure long term employment outside the UK, together with growth in new work output increasing.

Paradoxically, a trend of reducing preliminaries costs (as a percentage of works costs) is appearing as Contractors look to maintain a competitive edge in the face of rising trade costs.

The General Building Cost index rose by 0.9% in 4th quarter 2016 compared with the previous quarter and by 3.1% 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 1.9% in the third quarter of 2016 compared with the previous quarter but rose by 4.3% compared with the same quarter in 2015 on the back of a continued flow in new orders.

Materials prices rose by 0.8% in the 4rd quarter 2016 and 3.1% when compared with the previous year. This level of increase is expected to continue over the period of the forecast given the poor exchange rate anticipated over the next few years as supply agreements are re-negotiated.

General Inflation rose by 1.6% over the same period, below the government’s target level of 2%, a figure which it is currently anticipated will be exceeded during 2017, and remaining near 3% for the foreseeable future.

Overall, the forecasts continue to fluctuate regularly as the picture on the withdrawal from the European Union continues to evolve, making long term forecasting particularly difficult.

Construction Output Forecast

Over 2016 the total volume of construction output rose by 1% with new work output rising by 3%.

It is now anticipated that total construction output will continue to 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 10%.

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

To Summarise

In general, an optimistic view remains with reasonably full order books for 2017 and in some cases into 2018, despite an initial reduction in enquiries and rendering opportunities following the EU referendum.

It is evident that many projects are now live again which together with existing workload will generate a good level of output for the sector in 2017. Increased forecast growth in the economy a whole will also help.

Going forward only time will tell with the recently announced General Election yet another hurdle to overcome.

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© 2017 Thomson Gray Ltd
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