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
2011 was a delicate year for the UK as the economy lost momentum in the second half, with doubt currently shrouding prospects for 2012 amid warnings that the UK may see a return to recession early this year, hindering the government’s intention to simultaneously cut debt and promote economic growth.
UK GDP preliminary growth estimates from the Office for National Statistics (ONS) suggest the economy shrank by 0.2% in the last quarter of 2011, attributable to declining manufacturing output, falls in electricity and gas production and the output of the construction industry and a standstill in the services sector. In spite of this the UK grew during the year of 2011 by 0.9%.
Recent turmoil in the Eurozone and muted activity in certain areas of the UK economy has undermined consumer and business confidence and growth generally, particularly in the industrial and manufacturing sectors with output in these areas down significantly. Retail activity has been mixed, with varied financial results from some of the UK’s prominent retailers as the high street continues to suffer amid concerns of high inflation and job security.
Inflation remains high, though the latest figures from the ONS show inflation dropping to 4.2% for the month of December as a result of lower fuel and clothing prices. Utility companies have recently announced price drops and with interest rates reported to remain at record lows during 2012 it’s hoped this may stoke confidence and activity as well as bringing rates of inflation closer to the government’s 2% target. The Bank of England (BoE) is expecting inflation to drop to 2% by the end of 2012. The BoE has announced in February 2012 further quantitative easing in the sum of £50bn however there is debate over whether this will have a positive impact on inflation and the economy as a whole (Construction and the economy - an update).
Prospects for future growth have also been downgraded by the International Monetary Fund (IMF) as it slashed its growth forecast for the UK from 1.6% to 0.6%. Despite the prospect of a second consecutive quarter of negative growth which would see the UK enter recession, the possibility of a prolonged downturn hinges upon the Eurozone implementing a credible plan to resolve its financial difficulties. Consumers and businesses are dependent on an improvement in the Euro area in order promote confidence and growth.
BCIS – General Building Cost Index
Source: BCIS (Building Cost Information Service)
BCIS – All-in TPI
Source: BCIS (Building Cost Information Service)
Building costs throughout 2011 rose steadily and although they’re expected to stabilise during 2012 inflationary pressures are nevertheless set to remain as labour wage strains and competitive labour forces continue to affect input costs.
Increased materials prices will persist as intensive demand in East Asian countries – particularly China – and 2011’s natural disasters continue to push commodity prices upwards. Metal and ores prices have all witnessed increases, with the price of copper rising by over 20% in 2011. Aggregates and steel prices also remain high, driven again by demand in developing economies, despite increases in global supplies.
Oil prices oscillated throughout 2011 as a result of the unrest in North Africa and the Middle East. The EU’s embargo on crude exports from Iran and Tehran’s threat to close the Strait of Hormuz through which 17m barrels of oil traverse daily leaves crude prices at a high of around $110 per barrel.
Construction materials – Imports vs. Exports.
The UK sources £12 billion of construction materials from abroad whilst exporting £6 billion, a net balance of £6 billion. As 60 – 65% of both imports and exports are with the eurozone countries, the euro exchange rate is significant to both UK construction costs and the wider economy. During the 1990s the trade gap in construction goods was around £1 Billion. From 2000 to 2007 as the Euro exchange rate improved the gap widen to £6 Billion as foreign goods became cheaper in the UK. Although the exchange rate dropped dramatically to almost parity in 2009 UK manufacturers of construction materials have not been able to increase their market share either in the UK or in the export market. Whilst there are some recent signs of improvement an increase in the exchange rate will favour importers.
Some major European suppliers with UK divisions may be at risk when internally trading as they tend to fix exchange rates for set periods of time, most continental suppliers will only fix exchange rates once orders have been secured.
UK Construction Materials – Imports vs. Exports
Activity in the commercial sector decreased towards the end of 2011 driven by an uncertain economic outlook, manifested by sharp falls in London and the south-east. Office, retail and industrial sectors were the hardest hit, leading to the fifth consecutive month of decline in private development according to the estate agent Savills. Confidence amongst commercial developers is also at a low, driven in the most part by sentiment relating to lack of financial lending and economic uncertainty. The Royal Institution of Chartered Surveyors (RICS) echoed these sentiments by reporting falling occupier demand and rising availability leading to an ever increasingly negative rental outlook. The supply of new work also eased back across all sectors with enquiries for office space and expectations for future transactions also decreasing. Surprisingly London saw occupier demand fall for the first time in 18 months and available space rise for the first time in while, confirming that sentiment is affecting all regions across the UK. 2012 poses a tough challenge for the residential sector as the economy continues to adversely affect confidence amongst house buyers throughout the UK, compounded by continued lack of mortgage availability and fears surrounding the labour market. The BCIS have revised their forecasts for Construction Output which has seen them downgrade the growth forecasts for the next 4 years, with 2013 seeing a negative swing of 5.5%.
BCIS Output Forecast
|Year on Year (1Q to 1Q) ||September 2011||November 2011
A cautious mood will continue to pervade the construction industry throughout the first quarter of 2012, fuelled by acute economic uncertainty. Driven partly by uncertainty in the Eurozone, this region will continue to undermine confidence until a solution is found, although there are reportedly safeguards now being implemented to prevent Greece defaulting on its debt. Employment prospects, both for the construction industry and economy as a whole, will remain depressed and inflationary pressures will intensify the competitiveness of the construction industry. With predicted construction outputs having been revised downwards for the next 4 years a weakened demand will continue to counter any material and fuel inflationary pressures.
Cuts in public expenditure are suppressing the supply of public sector projects.
Suppressed economic activity is limiting the speed at which the private sector can respond to this.
Construction output contracts in Q4 2011 with low levels of confidence, uncertainty in the Eurozone and a multitude of other external pressures continuing to undermine prospects for 2012 and beyond.
Material, labour and oil prices continue to exacerbate the competitiveness of the construction industry leading to an eye watering number of construction firm insolvencies and leading to firms seeking to bid for unfamiliar work.
The table below shows our competitor’s TPI forecasts and has seen a downward movement in predictions over the last quarter.
|Cyrill Sweett||Q4 2011||-0.0%||+1.0%||+2.0%||+3.5%|
|Gardiner & Theobald||Q4 2011||0.5%||+2.0%||+3.0%||+3.0%|
|Turner & Townsend||Autumn 2011||+2.8%||+3.3%||N/A||N/A|
|EC Harris||Autumn 2011
Employment prospects in 2012
Latest figures from the ONS show mixed employment prospects, with unemployment at its highest levels since 1996 with the rate reaching 8.4%. Despite this, there has been modest growth in the number of those in employment, rising by 18,000 in the three months to November together with a rise in the number of self-employed of 101,000 to 4.3 million. A survey by the Recruitment and Employment Confederation (REC) showed an overall increase in permanent jobs in the four months leading up to January, with strong demand for construction staff. However, the Chartered Institute of Personnel and Development (CIPD) has forecast rising unemployment in 2012 and 2013, as the private sector fails to counteract the job losses predicted for the public sector in 2012 with the private sector creating 5,000 jobs in the months to November 2011, whilst the public sector lost 67,000 in the same period. Regionally discrepancies exist in the number of those applying for jobs in the south compared to other regions of the UK, with application rates for non-skilled jobs much higher than those requiring specialist skills such as construction related disciplines. Overall, the evidence suggests a flat UK economy with indictors such as the number of vacancies painting a bleak picture for employment in 2012 and leaving the UK economy suffering the consequences of muted growth.
Construction activity and outlook
Contributing to the latest GDP growth figures, the ONS has reported construction output falling 0.5% in Q4 2011 compared to an increase of 0.3% in the previous quarter leading the Construction Products Association (CPA) to predict further falls of over 5% during 2012. Forecasts from the Construction Industry Training Board (CITB) predict fall of 3% in construction output in 2012, stoking concerns that up to 45,000 jobs could be lost in the construction industry. Their Construction Skills Network (CSN) survey suggests that overall construction employment will rise by 76,000 by 2016 though this is well short of 2008 levels.
Data from the ONS shows construction output in November 2011 at 0.2% higher than the previous month of October, but 1.6% lower than the same period in 2010. In the 3 months from September – November 2011, total volume of construction output fell by 1.2% (-£338m) whilst new work fell by 1.3% (-£241m) compared to the previous quarter. Increases were seen in new infrastructure work – increasing 14.7% (+£436m), private commercial new work – increasing 2.8% (+£178m) and non-housing repair and maintenance – up 4% (+189m), whilst decreases were seen in new public non-housing work, declining 14.9% (-£536m). Unfortunately the problems in the Eurozone are continuing to promote uncertainty and dampen confidence in the private sector making investors more risk averse. Construction insolvencies reached 5,215 in the last two years alone with London, the West Midlands, Yorkshire and the North West being the worst affected regions according to PwC (PriceWaterhouseCooper). Owing to the government’s capital spending programme and continued uncertainty surrounding the economy, PwC suggest there is little sign of this trend halting. Given the importance of the public sector’s contribution to growth in the construction sector, further cuts in this area will only serve to harm growth prospects for the sector and continue to constrain UK GDP growth overall. Many within the industry are hoping the government recognises these difficulties by quickly and decisively implementing their heralded infrastructure programme responding before things potentially take a turn for the worse.