Construction Inflation Report

Posted October 2009

Summary

The BCIS TPI forecasts continue to predict a downward momentum for the coming 2 years, as the over supply of capacity provides an an ultra competitive market place.

Recent tender returns across the UK have been subject to high levels of discount, reflective of the varying market conditions across regions and sectors.

Data for 2008 has been firmed up to reflect the actual index movement compared to the April 2009 forecast. 

The 2012 forecast has been revised upwards to reflect the likely inflationary pressures and contractors quickly adjusting capacity to suit supply.

Regional variations are likely to see London and the South East subject to greater inflationary pressures ahead of the rest of the UK.

Faithful+Gould UK Tender Price Index (TPI) forecast

The Faithful+Gould forecasts follow the BCIS Industry standard forecasts, adjusted to reflect Faithful+Gould's market intelligence, and are based upon a year on year percentage change.

Construction orders

The BCIS forecast for new construction work output in 2009 is to fall sharply with the Office of National Statistics (ONS) reporting that in the 12 months to July 2009 construction orders fell by 24%.

Analysis of the various sectors, for the 12 month period to Q2, 2009, shows that the overall housing sector and all private sector orders have fallen whilst public funded projects and infrastructure works had substantial increases in orders.

The BCIS has provided a base forecast option with 2 alternative scenarios which deal with the anticipated effect of:

1. Continued contraction of the private sector expenditure, and
2. 10% central government spending cuts.

We have based our forecast on the BCIS scenario 2 which we believe to be the most probable outcome.

New construction workload on publicly funded projects in infrastructure, health and education continue to dominate the order books though it remains to be seen for how long this can be sustained due to its predominant reliance on Government spending.

Construction orders - 12 months to Q2, 2009

Speculative retail, commercial and other private sectors continue to show a decline in activity with the words ‘pre-let' critical to any likelihood of projects proceeding.

It is however important to note that pre planning and pre construction activity in these markets has renewed recently with some developers showing increased determination to bring forward schemes.

New orders by sectors, Q2, 2009

Order for public construction work

Order for private construction work

Underpinning the optimism

Industry bodies such as the CBI, The Bank of England and the media in general have been declaring that the worst of the recession is behind us.

With the Chartered Institute of Purchasing and Supply (CIPS) reporting optimism within industry at its highest level within the last year it is natural for most of us to look for the confirming signs of a recovery in what continues to be a difficult and challenging market.

This is reiterated by The Bank of England forecasting positive growth in GDP in 2010 and the ONS reporting a rise in construction orders during Q2, 2009 compared to the previous period.

However, this needs to be read in context with ONS October 09 statement that there is risk of a double dip recession.

The Government's injection of capital into the market, whilst welcomed, has been met with caution as this assumes promised public funding continues to be made available and is released in a timely manner.

Following the Spring 2010 general election there are likely to be reductions on government capital expenditure and in the interim there is continued uncertainty to the extent to which the cuts will directly impact the construction sector.

The latest RICS survey displays positive evidence that housing market activity continues to improve with the recovery of house prices boosting confidence in the housing sector and industry as a whole.

Despite this it is important to note that banks are not forcing land sales like that seen in the 1990's recession and this has resulted in housing companies holding onto land banks and not building until such time when house prices increase to support the book land value.

The optimism lingering amongst independent researchers is also dampened by the RICS reporting that tender prices won't return to pre-recession levels for at least 5 years.

The industry's growth is dependant on the recovery of the economy as a whole and continued input of public spending and it is yet to be seen if the ‘green shoots' are deep rooted enough to withstand the looming spending cuts anticipated after next Spring's election.

Key changes

• Public works and infrastructure orders continue to increase
• Contractors adjusting capacity
• Housing market decline stabilising
• Continued reduction in construction output
  
  

Competitors' views

This table shows our competitors' forecasts, highlighting the variable predictions on construction inflation (% change year on year).