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.
- The UK short-term economic forecast has strengthened to 3.1% GDP (Gross Domestic Product) growth for 2014, albeit with slightly more cautious forecasts for growth in the medium term.
- Construction activity reported as up 4.6% year-on-year in April 2014, with increase driven primarily by the private housing sector. Source: Office for National Statistics (ONS)
- Tender price inflation forecasts continue to rise, however increases remain more prevalent and consistent in London than in other regions of the UK.
- Annual CPI Inflation is forecast to have decreased to 1.5% in May 2014, with forecasts remaining below 2% until the end of 2014. The main contributing factors have been the downward effects of air fares, food and non-alcoholic beverages (ONS).
General Economic Outlook - UK
Remaining firmly in recovery mode, the UK is reported to be leading global markets out of the recession with stronger short-term forecasts for GDP growth in 2014 relative to other G7 economies. While this optimistic short-term outlook can be welcomed by businesses and investors, medium-term forecasts warn that growth will not be sustained at the current levels of 3%; GDP growth is forecast to continue to increase at a more modest level of 2.5% through 2015 and 2016.
The British Chamber of Commerce (BCC) points to the fact that the significant recovery in GDP growth has primarily been driven by rapidly falling unemployment and artificially high consumer spending, partly due to the historically low rates of interest. This also serves as a reminder that GDP recovery has started from a very low base and that pre-recession levels of GDP are not forecast to be surpassed until 2017 at the earliest.
Short-term labour market and employment trends are consistent with a recovering economy. In June’s ONS labour market report, figures for the period February to April 2014 show an employment rate of 72.9%, up 0.6% on the previous quarter. This includes 345,000 more people employed since the period from November 2013 to January 2014, up to 30.54m. In addition, 637,000 job vacancies were recorded between March and May 2014, however this remains 59,000 below the pre-recession peak from January to March 2008. In terms of unemployment, this has decreased from 2.51m to 2.16m from a year previously, a decrease of 347,000. The Bank of England nevertheless warns that productivity is yet to reach pre-recession levels and that there remains considerable slack in the labour market, due to the significant number of newly employed who are working part-time.
Figures relating to construction output generally display signs of growth, albeit with certain caveats. The ONS’ latest construction output statistics, released on 13th June, estimate that between March and April 2014, output has grown by 1.2% (£133 million). In addition to this, year-on-year output between April 2013 and April 2014 rose by 4.6%, which included a 4.9% increase in the value of new work and a similarly robust increase of 4.2% in repair and maintenance work. This increase in output can largely be attributed to the significant private and public investment in new housing, accounting for 16.6% and 26.3% year-on-year increases respectively.
Quarterly increases, at 0.5% and 5.6% are however far more modest. The private industrial sector has also performed well, showing increased output figures of 11.7% on the quarter. Nevertheless, output in the infrastructure sector remained in decline, with quarterly output decreases of 6% and 7.6% year-on-year. Public sector output also remains weak, with a decline of 2% on the quarter and 0.8% year-on-year.
The short-term forecast for new orders does not provide as positive data. In total, ONS reports for Q1 2014 show that new orders had reduced by 6.3% since the previous quarter. There were falls in the volume of new orders for all types of work other than the private housing and public sector (excluding public housing). The most notable quarterly decrease in new orders was in public housing (47.5%), however the ONS suggests that this can be explained by a switch in the source of investment to housing associations, which is now originating from private, rather than public funds.
The less positive figures provided by the new order forecasts for Q1 2014 are in contrast to BCC forecasts for the long term growth in output. In the longer term, the BCC forecasts growth of 3.3% in 2014, 3.1% in 2015 and 3.0% in 2016. These figures perhaps take in to account more positive data for growth in the infrastructure sector, as explained below. Certainly, the low quarterly figures for Q1 2014 could also be explained by adverse weather conditions experienced in many parts of the UK during the early months of 2014.
Fears that the Help to Buy Scheme would fuel inflated house prices at a national level have proved unfounded, while house building has grown considerably year-on-year. Prior to the Chancellor’s Budget in March 2014, the Construction Products Association (CPA) presented its concern over whether demand for the housing market would continue at its current pace beyond 2016, without the support of Help to Buy. However, with the announcement in this year’s Budget that the Government is set to continue this policy until March 2020, fears of a long-term fall in demand for the housing market have diminished. The extension of the Help to Buy Scheme, which offers guarantees to lenders offering mortgages, includes the provision of a £500 million Builders’ Finance Fund to SME housing developers and the creation of a new Urban Development Corporation to establish a new garden city in Ebbsfleet. In total, the Budget highlighted the Government’s support to building 200,000 new homes between 2014 and 2020. Further statistics also provide positive news in the short term, with a 19% increase in housing completions is forecast for 2014. Both this and the extension of the Help to Buy policy has helped increase confidence in the housing sector in the medium to long term, which should therefore experience sustained growth in the short term. The medium to long term growth prospects have also been strengthened by these announcements.
In a Downing Street Press Release issued on 22nd April 2014, £36 billion of planned investment in Infrastructure for 2014-15 was announced, supporting approximately 150,000 construction jobs and adding up to 5% to UK GDP. The announcement of this investment pre-empts forecast growth of 10.1% in the sector, with 200 Major Projects due to start over the next two years and a £38 billion 5 year programme of funding for the Railway Sector. Progress with existing major projects is also being made, with 200 projects due for completion in 2014. This includes major road projects such as the M6 J10A-13, the Nottingham tram extension, completion of Heathrow Terminal 2 and Gwynt y Môr Offshore Wind Farm, the largest of its kind in Europe. During the first two quarters of 2014, major landmarks have also been achieved in the construction of London’s Crossrail Project, with the majority of the tunnel boring work complete by the spring. Therefore in the short to medium term, the forecast growth in activity should offset the Infrastructure Sector’s poor output figures from previous quarters of 2013 and 2014 and the new wave of investment will provide a needed boost to contractors.
With respect to the longer term prospects for growth in the infrastructure sector, the Government has in recent months provided greater transparency on the direction it wishes to pursue over the next 10 years. The National Infrastructure Plan Finance Update issued by HM Treasury on 19th March 2014 was a response to demand from investors to provide greater clarity on the investment opportunities available within the UK and contains a list of the Government’s top 40 priority infrastructure investments. Highways investment, which features prominently within this list, is a subject that has been addressed through the introduction of a draft Infrastructure Bill which will enable the Highways Agency to be transformed from an entity run directly by the Department for Transport to a “Government owned”, yet independently managed, organisation. This change will transform the Agency’s decision making process vis-à-vis the Strategic Road Network and will eliminate the need for ministerial scrutiny on such decisions. A Clyde and Co. report on UK Infrastructure in 2014 suggests that the Bill will also allow for a new “Road Investment Strategy” to be developed, which will provide a committed revenue stream and enhanced certainty for contractors. This will be operated over a five year period and will reflect the model already in use on the UK’s Railways.
The future for Network Rail is not as certain however. In a recent statement made by the ONS, in which a change to the classification of Network Rail was announced, this previously privately-run and not-for-profit institution will join the Public Sector from September 2014 onwards, due to the introduction of new European accounting rules. Network Rail has stressed that for the time being, this remains little more than a statistical change, however there have been reports that the Department for Transport (DfT) does not yet fully understand its implications. Despite this confusion, the DfT and Network Rail have entered into a Memorandum of Understanding, which states the Government’s desire to continue some, if not all, business as usual. The memorandum also re-affirms the DfT’s commitment to the existing Rail Investment Strategy for 2014-2019, HS2 and the Rail Franchising Programme. Therefore, for the time being, it does not appear as if the reclassification poses a risk to the longer term future of Rail Investment; however, this situation should be monitored closely, as the Government is due to review pay and incentives for Network Rail Senior Management, which could bring inevitable significant changes to the constitution of the Management team.
Investment in energy infrastructure remains a priority for the UK Government. In the 22nd April Downing Street press release, it was announced that the Government is expected to invest up to £15 billion in Oil and Gas this year, with a further £25 billion to be invested over subsequent years. The Government statement suggests that it has found new ways of unlocking private investment (through institutional investment) and that it is focussing its efforts on creating favourable tax conditions for investing in the Renewable Energy Sector. While the latter is particularly relevant to Shale Gas investment, the Government has implemented other attractive reforms such as the Contracts for Difference (CfD) Scheme for low carbon generation activities, which will protect investors from fluctuations in wholesale electricity prices, provide increased certainty about future revenues and help reduce the initial cost of capital. This, coupled with the Electricity Market Reforms, should minimise the risks traditionally associated with investment in the Energy Sector.
Materials and Input Costs
During the last quarter, there have been increasing concerns, despite the positive data relating to workload and employment, that the risk of material cost rises could undermine a sustained recovery, with 80% of SMEs expecting material cost rises and material shortages over the next six months.
This is an issue which has been echoed by the Federation of Master Builders (FMB). Brian Berry, Chief Executive of the FMB, has suggested that materials prices are generally around 10% higher across the board with small construction firms highlighting timber products such as sheet materials and timber fencing as being particularly expensive. Added to this are concerns over the ready supply of particular materials, such as bricks, which are in short supply following the increase in house-building activity over the last year.
Material costs have however remained fairly level from a year-on-year perspective, with costs running roughly in line with CPI. The BCIS Materials Cost Index indicates only a 0.5% increase in the year to February, a very modest increase, which could be explained by weak oil prices caused by the continuing increased supply from non-OPEC States. During the last quarter, there have however been 0.3% increases in oil prices caused by uncertainty in Ukraine.
The price of metals such as copper and gold have seen fairly stable prices over the past twelve months, however aluminium has seen a more recent price surge, with prices increases of 0.5% over the last quarter. Structural steel prices also appear to have bottomed out and are beginning to increase.
London and the South-East remains the most buoyant of all the UK regions. However, with national contractors beginning to be much more selective when tendering and with material costs predicted to increase, cost indices rises look inevitable.
The UK economy is set to remain in strong position of growth for the medium term, with sustained GDP growth forecast for 2014-2017. The construction industry is expected to continue showing sustained and potentially increasing levels of output, especially with regard to the housing and infrastructure sectors, due to the Help to Buy and Energy Market Reform stimulus packages initiated by the UK Government in spring 2014. Concerns over the cost and supply of materials may increase lead-in times and increase the pressure on construction inflation.