Faithful+Gould UK Tender Price Index (TPI) forecast
The Faithful+Gould TPI 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.
General Economic Outlook - UK
The economy continues to be strongly affected by the action taken by the government to simultaneously tackle the budget deficit and promote growth. As well as a range of measures introduced in the March 2011 Budget, other pressing concerns include rising inflation which is being driven primarily by rising fuel and food costs.
The CPI (Consumer Price Index) rose to 4.4% in February, well above the Bank of England's target of 2%, though it fell in March to 4% driven by falls in the price of food and alcohol. There are fears that this may lead to a hike in interest rates to alleviate the pressures on rising prices on products such as fuel, with the British Chambers of Commerce wary of any action the MPC (Monetary Policy Committee) may take and the possible effect this could have on the UK's economic recovery. The unusual combination of low growth and above target inflation could have severe consequences for the UK's economy if not properly addressed; indeed, some have warned that a premature rise in interest rates could prove ‘disastrous'. Although the issue of a double dip recession seems to have somewhat disappeared from the media's attention, it is nonetheless still a potential threat.
The UK economy is also yet to feel the full force of the government's intended spending cuts. In addition, rising inflation doesn't appear to have fed through to higher earnings growth; indeed firms appear to be keeping salary increases, if any, well below the rate of inflation.
Following the Budget in March there appears to be some hope that the measures announced by the Chancellor to try to boost output will have a positive effect in pushing economic growth and stimulating job creation. However it is too soon to tell whether this will actually transpire.
On March 24 the Chancellor announced a range of measures as part of the government's plans for sustained growth throughout 2011. Among some of the benefits to the construction industry were further green investment, with £2bn being made available through the Green Investment Bank, a two-year public sector pipeline with money pledged towards infrastructure, a further £100m for dealing with winter potholes, a new shared equity programme and reforms to the planning process.
There was a lukewarm reception to the measures announced regarding reform of the definition of zero carbon homes, with the Green Building Council expressing concern over the omission of electrical appliances, though heating, lighting and water remain part of the definition. The RICS also found time to express its concerns over what it sees as a u-turn on the standards for zero carbon homes. Announced as part of the Treasury's Plan for Growth, the RICS expressed concern over the apparent dilution of standards. Despite this, the RICS generally welcomed the range of announcements the government has made to push growth during 2011. Other commitments include demonstration carbon capture and storage to be funded from general taxation, though there was no further detail on the Green Deal (incentives to improve household and commercial energy efficiency at no upfront cost) other than a promise to launch incentives in an attempt to get the Green Deal off the ground.
For transport, an additional £200m is to be invested in regional railways and an injection of £100m on the initial £100m to repair the winter potholes. The cost of fuel is also being cut by 1p, a move funded by a windfall tax on North Sea oil companies.
The FirstBuy scheme - an iteration of Labour's previous HomeBuy Direct scheme - sees £250m provided by the government in an attempt to help first time buyers onto the property market. Major house builders responded positively to the news, which will give first time buyers access to a 20% equity loan provided jointly by the government and developer. Though a welcome step in the right direction, it is however already raising concerns over the sustainability of housing supply in the long term and according to the Chartered Institute of Housing will do little to allay fears over the UK's current housing crisis in the long term.
Capital spending for education for the year 2011-12 was stated at £5.1bn, slightly higher than the amount allocated in the comprehensive spending review due to savings made on the academies programme. The James Review outlined key recommendations for the future of education programmes in the UK and is expected to shape the future direction of capital spending in the education sector, with recommendations encompassing standardisation of design and procurement of major projects. The government is due to respond shortly, though it is expected that public construction costs will be cut by up to 20% as the government seeks standardisation in procurement. Additionally, £150m of new capital funding was pledged for at least another 12 more university technical colleges.
These measures serve to illustrate that the government recognises the problems currently affecting the UK's construction industry. The CBI also recognised the potential role the Budget can play in the creation of new work and jobs in the construction industry. In particular, the CBI welcomed the shared equity scheme as a short term boost but again reiterated concerns over housing provision and the requirement for a longer term solution.
Fukushima Daiichi Nuclear Crisis (Japan)
The events that unfolded in Japan in early March have asked questions of the safety of generating nuclear power. Although policy per se has remained the same, there are a number of immediate and longer term implications, the effects of which are already being felt and which may alter the perception of and action towards nuclear power generation in the UK.
The UK government has already commissioned the Chief Nuclear Inspector to report on the implications of events in Japan for the UK's nuclear programme. In the short term there is the effect on programme whilst the report is being commissioned, as there can be no confirmation on the UK's policy until the findings of the report are known. Secondly, there are the political and financial influences and the ramifications these will have on the attractiveness and viability of nuclear power.
Currently the UK government remains neutral on the issue, neither committing to nor falling away from the nuclear programme at least until the report's interim findings are published. However as with the uncertainty surrounding the schools programme, it is clear that the construction industry needs unambiguous direction on the future of the nuclear programme driven by a fair and objective review of the evidence, though this will be driven in the main by the report's outcome and recommendations.
In light of this, the long term argument hasn't changed - we still live in a world requiring a lot more energy. Geo-political issues over oil and gas, climate change and intermittency over renewables are all reinforcing the need for nuclear power generation. Until the report's findings are published, the construction industry will continue to hope that the energy and utilities sector continues to supply this important stream of work.
In light of the anticipated effect that government cuts are to have on the construction sector, sentiment suggests that construction activity remains positive in certain areas, growing slightly from the abrupt decline in construction activity during Q4 2010; see ONS (Office for National Statistics) output. The CIPS (Chartered Institute of Purchasing and Supply) remained cautious over growth in 2011 however, expressing concerns over the potential impact of government spending cuts, volatility in house prices and poorer consumer confidence. In line with this, Experian has revised its forecast for construction output to -2.1%, this contrasting with the -3.6% drop predicted in Q4 2010. The CPA (Construction Products Association) also anticipates a drop in construction activity, predicting construction activity to fall by 1% in 2011.
Behind Experian's revised forecast are better than expected order figures feeding through from the private construction sector, this including commercial sector growth of 2% this year and anticipated growth in private residential housing. However, declining public sector housing activity, the cancellation of the BSF programme and completion of the Olympic site will all contribute to declining construction activity over 2011/12. There is also evidence to suggest that the UK housing market will slow down and remain flat during 2011, with Taylor Wimpey adding that despite resilience in this sector, unsold stock and lack of effective demand continue to drag on housing transactions. Additionally, there are concerns over the possibility of a hike in interest rates and the effect this could have on buyer's perceptions. In any event, it would seem that the private sector is beginning to fill the void left by the cuts in public sector capital spending though it has not entirely matched the downturn in public sector spending.
The outlook for the commercial construction sector has improved in Q4 2010 from the previous quarter. Some of highlights include tenant demand for retail space rising across the board, whilst demand for office space in central London saw a big turnaround and demand for industrial space in the North also experienced a notable pick up. However, surveyor's cited a continued uncertain outlook in the short term as a drag on the market although lettings activity and available space is beginning to stabilise across the retail, industrial and office sectors. New development starts continued to decline for the third year in a row, though investment demand for properties has begun stabilising.
Volume of Construction Output in GB: Constant 2005 Prices
Source: ONS (Office for National Statistics)
Volume of Orders for New Construction Work by Main Contractors in GB
Source: ONS (Office for National Statistics)
The recession had the effect of decreasing UK construction prices, particularly the price for structural steel, through decreased demand. Despite a hike in raw material prices throughout 2010, construction material prices ended 2010 stable and in some cases fell back through a faltering economic recovery and lack of demand for new construction work.
However, the floods that occurred in Australia in early 2010 had global implications and again affected the cost of producing steel, in particular coking coal and iron ore. Australia produces over half of the global demand for coking coal and it is estimated that 5% has been removed from world markets this year, this alone enough to cause manufacturing costs to rise significantly and spot prices to creep upwards as producers scramble for coal where they can find it. Coal pits remain closed and the infrastructure used to transport coal from mines to export ports has been severely damaged and will take time to rebuild.
World Oil Price
Source: Energy Information Administration
Additionally, iron ore and scrap prices have also been rising in part due to demand from capital intensive and growing economies as well as disruption in the production of iron ore in India and Brazil. Recent political and economic events in the MENA (Middle East and North Africa) region saw oil prices move above $110 a barrel, which is a 2½ fold increase from the cost approximately 26 months ago. The increase in energy costs is anticipated to continue affecting the GBCI (General Building Cost Index) which is expected to move above the 3% year on year level later this year.
BCIS - General Building Cost Index
Source: BCIS (Building Cost Information Service)
BCIS - All-in TPI
Source: BCIS (Building Cost Information Service)
The UK's economy is still in a precarious position. Despite the government's best efforts to stimulate the economy and provide the construction industry with the boost it needs, GDP growth remains low yet stable and inflation remains above target levels with household real incomes expected to fall for the second year in a row. Despite varying forecasts for GDP, it is commonly believed that GDP growth will be positive for 2011 at around 2%, and beyond as household incomes begin to stabilise and inflation falls away.
In the construction sector, output is expected to stagnate until at least 2013 as government cuts begin to bite, construction of the Olympic Park begins to conclude and housing continues to encounter supply and demand problems. Oil price movements show no real signs of relenting and materials prices will continue to prove turbulent in the face of recent events in Australia. Elsewhere, uncertainty will continue to surround the future of the nuclear programme, despite more subdued reactions now to the crisis affecting Japan, until the findings of the report are published.
The government has indicated the importance it attaches to the construction industry in its recent Budget and Growth Plan. It is hoped that the measures will have the effect of increasing confidence in UK plc, as they aim to encourage job creation by increasing the supply of work in the pipeline and boosting confidence amongst the public, construction firms and investors. Amongst the announcements was the new FirstBuy scheme, which though alone will not alleviate the pressure surrounding UK's housing supply, is nonetheless a welcome step in the right direction and one that will hopefully assist the economic recovery. Again, construction remains at the forefront of the economic recovery though it will be some time before the effects of these measures can be tangibly observed.
- Construction tender price inflation expected to rise in 2011
- Modest GDP growth for the UK economy
- Construction output to fall slightly for 2011
- Budget measures generally welcomed and expected to positively affect both the construction industry and economy
- Materials input prices continue to rise
This table shows our competitors' forecasts, highlighting the variable predictions on construction inflation.
|Cyrill Sweett||February 2010||-5.0%||+1.25%||+2.5%||+3.75%||+4.0%|
|Gardiner & Theobald||Q1 2011||-4.0%||0.0%||+2.0%||+3.5%||+3.5%|