CONSTRUCTION COMES OUT OF A FEVER BUT ARE BREXIT WORRIES TRIGGERING A SLOWDOWN? Spring 2016
The Arcadis view is that 2016 will see the UK construction market coming out of a fever and returning to stable growth, knocked temporarily by uncertainty associated with the EU referendum and economic volatility in global markets. • Broadly and beyond current uncertainty in the UK, demand will continue to see construction markets grow annually by between 3-5% to 2020. • Uncertainty in the market, significant capacity constraints and high construction prices are leading to delayed starts on site and an unpredictable market place where viability continues to be a barrier to growth in construction activity. • Construction price inflation will continue, increasingly driven by rising input costs, but at lower rates compared to last year. • In the face of uncertainty in the first half of this year, particularly in London, we have revised down our London TPI forecast for 2016 slightly to 3.8%. • The UK economic outlook remains one of the most positive in the developed world with estimated annual growth at over 2%, which will foster a supportive environment for construction. • Depreciation of sterling and some rebounding commodity prices are increasing import and input costs. • Scarcity of labour continues to be a primary risk across all sectors and a threat to further growth in the industry. • Our market view is based on the assumption that the UK will remain in the EU. A vote to exit would result in a number of potential short and long term impacts on the economy and construction sector.
WHAT IS HAPPENING TO TENDER PRICES IN 2016? As forecast in our last Market View at the end of 2015, our updated tender price forecast reflects that we expect prices to continue to grow in 2016. We have reduced our assessments of inflation for the year to Q4 2016 to 3.8% for central London and held them firm for regional construction and infrastructure inflation. Our updated forecast is summarised in table 1 below. Table 1: Construction Tender Price Inflation Forecast Year
Regional Markets (%pa)
London (%pa)
Infrastructure (%pa)
2016
4.7
3.8
5.0
2017
4.0
4.3
5.0
2018
3.7
4.5
4.5
2019
3.5
4.2
4.5
2020
3.5
4.2
4.5
Year on year, Q4 on Q4
There is a blend of upward and downward pressure on construction prices due to a variety of key economic and market factors, shown in figure 2. • High levels of uncertainty in the market are reported, stemming from the EU referendum, uncertainty in the UK economy and global economic jitters. • Most construction material prices continue to fall, data published by BIS shows that materials prices have fallen by around 3.4% in the past 12 months. • Despite some rallying of commodity prices in the first quarter of 2016, the long term trend of low prices remains. According to IMF data, metal prices including steel, nickel, aluminium and copper are down by an overall average of 30% since the start of 2015.