Construction Inflation Report

Posted April 2009

Summary

The last six months has seen a severe downward swing in the construction industry TPI forecasts and this is expected to continue falling for the next three years.

As the recession deepens and funding difficulties continue to impact contractors' order books, contractors are ever keen to secure future workload.

As a result, we are likely to see a number of contractors having financial difficulties and those which survive may seek to recover margin shortfalls through claims.

Faithful+Gould UK Tender Price Index (TPI) forecast

The Faithful+Gould forecast follows the BCIS industry standard forecast, adjusted to reflect Faithful+Gould market intelligence, analysed by a Faithful+Gould expert group covering all UK regions. The forecasts reflect year on year % movement.

2008 Recession - How long will it last?

Forecasting the length of this recession and the period of recovery remains very difficult with senior economists and governments still unsure how bad the decline may become.

Whilst it is recognised that the 2008 recession is very different from the last two recessions, we can trend historical data to profile how the construction industry would recover if this recession was to follow a similar recovery route.

The current economic recession differs from the last two predominately due to its global reach driven by negative financial conditions and the span of sectors it is affecting.

It appears that this recession could take approximately 30 quarters to recover back to pre decline levels based on the trend analysis shown below.

Recession analysis

Production output

In the first quarter 2009 the UK has seen the difficult market conditions being compounded by delays in central Government planned funding of major projects in the education and transport sectors and the rigidity of the HCA spending criteria.

In the Middle East, driven by collapsing oil prices and global economic turmoil, the previously immune oil rich countries have also seen a rapid decline in the construction markets.

Against this backdrop, the UK construction industry, which employs in excess of 1.5 million people (5.5% of the total workforce), will continue to see significant job losses. The resultant effect is an anticipated decline in labour rates being achieved as the effects of supply and demand take hold.

Material prices

Whilst material costs are still generally on the increase, there is evidence to show that over the 12 months between March 2008 and March 2009 steel and nonferrous metals have seen a significant fall.

Since steel production output can give an indication on the movement of construction activity, an analysis of overall steel production in the 12 months to February 2009 highlights a decline from 107 million to 83 million metric tonnes.

In the UK, steel production declined by 47%, slightly sharper than the rest of Europe average. Belgium is the most affected region in the European Union with a 74% decline in the same period.

Global steel prices are particularly sensitive to fluctuations in supply and demand. As a consequence of the recent significant decline in demand, the price of steel has plummeted by approximately 40%-50% in Europe and the global steel price index in March 2009 sat below that of 2004.

An analysis of the data depicts that the Middle Eastern steel market has shown more resilience to the economic downturn when compared to the Western countries, however this region is now showing signs of decline.

Steel production % change Feb 08/09

Key changes

• Construction TPI to continue to fall year on year for the next three years.
• Funding difficulties will continue to impact on future construction projects for cash-strapped clients.
• A number of contractors, sub-contractors and suppliers are likely to cease trading in the coming year as contracted financial commitments cannot be realised.
• Fragile currency markets may impact on construction imports.
• Outward labour migration from the UK may create skill shortages.

Competitors' views

This table shows our competitors' forecasts, highlighting the variable predictions on construction inflation.