Construction Inflation Report

Simon Raine
Construction output continued to contract for the 22nd month in a row in December 2009. However reports show a slower decline in construction activity which leads economists to believe that the broader economic recovery will have a positive impact on the hard hit construction industry.

Faithful+Gould UK Tender Price Index (TPI) forecast


20092010201120122013
October 2009 -7.0% -3.0% -2.0% +3.0% +3.0%
February 2010
-10% -3.0% 0% +3.0% +4.0%

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.

General Economic Outlook

The economic prediction in 1Q 2010 has moved away from continued recession conditions to stabilising economic markets. Economists believe the Government bail out and broad policy reforms such as all time low interest rates, increased public spending, reduction in tax take and liquid injection have benefited not only the Banks in financial difficulty but the industry as a whole. With the increased stability of the banking industry, Governments are implementing mechanisms of clawing back monies previously lent to rescue this sector. Despite the optimism in the financial markets the Monetary Policy committee in the UK has moved away from their earlier prediction that the UK economy would return to growth and the Bank of England's new GDP forecast is gloomier than three months ago.

Construction Industry

Despite the recovery in the Banking Industry the construction sector remains in recession. Construction output continued to contract for the 22nd month in a row in December 2009, according to the Chartered Institute of Purchasing and Supply (CIPS). The Institute however reports a slower decline in construction activity which leads economists to believe that the broader economic recovery will have a positive impact on the hard hit construction industry. This continued contraction in workload however has meant continued job losses in the sector. Additionally, according to BCIS, for the first time in twenty five years, the General Building Cost Indices has slipped into a negative figure.

Sector Analysis

Despite these reports the construction industry is showing some signs of optimism, with predicted growth for four consecutive months in the residential sector, coupled with increases in house prices reported in February 2010. The Office of National Statistics (ONS) reports that private housing orders rose by 41% when compared to the previous reported quarter, and the latest Royal Institute of Chartered Surveyors (RICS) survey displays positive evidence that housing market activity up to 1st Quarter 2010 continues to increase. The recovery of house prices is boosting confidence in the sector as a whole.

 

New construction orders by sector

Based on Office of National Statistics Report February 2010 

In 3rd Quarter 2009, industry workload in publicly funded projects in infrastructure, health and education continued to dominate the order books. This quarter has seen a significant slow down in infrastructure orders which fell by 13% when compared to 3rd Quarter 2009. The last few months have seen the private sector beginning to gear up for recovery as public sector investment is cut back. The longer term recovery of the Construction Industry will be heavily reliant on continued private investor activity which in turn requires to be underpinned by the availability of funds by the financial sector as well as an improvement in demand from occupiers in all sectors.

 

BCIS - General building cost index

 

 

BCIS - All-in TPI

Future outlook

Most commentators expect that deflation in the construction industry will have bottomed in the 1st Quarter 2011. This should bring about an increase in tender prices, although this will be dependant on the ability of the commercial sector to replace an anticipated government workload that is likely regardless which political party is in power following the general election.

We anticipate that commercial clients will see pressure on financial appraisals becoming more evident as the industry sees cost price increases from 2nd Quarter 2011 against a challenging economic outlook which is likely to see revenues at best stay stagnant. This is likely to see 2010 continuing to be challenging for the construction industry as the viability statements will see costs increases without the potential parallel revenue increases.

Key changes

  • The revised Bank of England's GDP forecast (February 2010) indicates the UK economy coming out of recession

  • Public works and infrastructure Orders fell by 13%

  • Private housing orders have shown a rise in order by 41% when compared to previous quarter

  • Housing market showing an increase in prices

Competitors' views

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


Forecast date2009     
2010201120122013
Faithful+Gould February 2010 -10%   
-3.0% 0% +3.0% +4.0%
BCIS February 2010 -10.9%   
-2.8% +2.9% +3.3% +3.2%
Davis Langdon
January 2010
-10%   
-4% to -6%       
-1% to -4%       
N/A
N/A
EC Harris
Q4 2009
-10.5%   
-3.0% +1.5% +3.0% +4.0%
Cyril Sweett
November 2009
-7.0%   
-5.0% +1.0% +2.0% +3.5%
Gardiner & Theobald
Q4 2009
-8.5%   
-4.5%
+1.0% +2.0% +4.0%
Sense (Mace)
February 2010 -10%   
-5.0% -1.0% +1.0%
N/A