Inflation Report ic n

Transcription

1 Q3 UK Inflation Report GDP growth beginning to slow Unemployment rate increases gleeds.com Follow CPI turns positive again but remains close to zero

2 Q3 Contents Introduction Statistics & Figures Outlook for GDP & Inflation GDP, CPI & RPI Movement Predictions Retail Price Index Inflation Forecasts Tender Price Forecasts Annual Inflation Rates Construction Production & Orders Change in Output Figures for the Main Construction Sector Value of Orders for New Construction in Great Britain Construction Sector Employment Market Reports Regions NORTHERN IRELAND SCOTLAND NORTH EAST, YORKSHIRE + HUMBERSIDE NORTH WEST WALES MIDLANDS EASTERN Construction Output Summary of Forecasts Regional Reports Acknowledgements Gleeds Contacts SOUTH WEST GREATER LONDON SOUTH EAST

3 Introduction Gleeds Economic Report assesses and summaries the factors affecting UK construction, taking into account inflation, construction output and orders, employment, and other topical matters. Looking back Construction output Output remained broadly flat over the quarter with similar figures for both Q1 and Q However, the RICS Construction Survey suggests that in fact activity levels have risen with strong growth in the commercial and private housing sectors. Construction output increased by 0.2 in Q2 compared to Q1 When compared to Q construction output has increased by 2.4 ANNUAL CHANGE In line with published, Gleeds assessment of market conditions, based on consultation with sub-contractors and the supply chain, concurs that construction output continues to gain strength in most of the UK. Q3 15 to Q3 16 Q3 16 to Q3 17 Q3 17 to Q3 18 Q3 18 to Q3 19 Pay and Employment The unemployment rate increased slightly in Q2 to 5.6 compared to 5.5 in Q1. 12 months ago the unemployment rate was 6.3 Average weekly earnings in the construction industry rose by 1.3 between June 2014 and June Construction Orders New orders in Q2 were up by 1.0 compared with Q1. Q2 shows a 5.2 increase compared with Q Gleeds assessment: construction output continues to gain strength despite broadly flat output EASTERN GREATER LONDON NORTH EAST, YORKSHIRE & HUMBERSIDE NORTHERN IRELAND MIDLANDS NORTH WEST SCOTLAND SOUTH EAST SOUTH WEST WALES Private new housing, infrastructure and public other new work increased by 3.9, 0.5 and 1.2 respectively quarter on quarter. All repair and maintenance decreased by 1.2 in Q2 compared with Q1; public housing repair and maintenance and nonhousing repair and maintenance reported falls of 0.4 and 3.9 respectively Gleeds regional inflation forecast Note: these are average regional forecasts based on activity and market awareness within each of our regional offices. Actual inflation will be determined by a combination of macroeconomics and micro project situations. Consequently, forecast inflation at a project level needs to be carefully considered based on the project s characteristics and the prevailing local conditions. Published can be misleading and subject to later revision and should be used with caution. UK AVERAGE

4 Statistics & Figures Outlook for GDP & inflation GDP rose in the Euro area in Q1 and a similar pace of growth is expected to be reported for Q2... CPI RPI JUN JUL JUN JUL Summary CPI inflation in July turned positive rising 0.1; the rate turned negative in April for the first time since 1960 A major contributor to the drop in inflation in June was the reduction of food and motor fuel prices. The recovery in July is attributed to the smaller fall in the price of clothing This is the 6th consecutive month that inflation has been at or very close to 0 The RPI remained unchanged at 1 in July RPIJ JUN JUL It is anticipated by the Bank of England that inflation will rise 0.25 within the first 4 months of 2016 and will double to 1 by the end of 2016 The Bank of England predicts that by early 2016, previous falls in the price of food, energy and other goods with have largely dropped out of the inflation rate thereby increasing their contribution to CPI GDP growth slowed in Q1 to 0.4 compared to the previous quarter and by 2.9 compared with a year previous. This was associated with a moderation in the UK-weighted world trade growth which impacts on UK export growth. GDP is likely to have risen slightly in Q2, with estimates of a 0.7 growth in Q2 as well as Q3 (note: the Q2 estimate has since been revised downwards to 0.2). GDP rose in the Euro area in Q1 and a similar pace of growth is expected to be reported for Q2. This reflects and is supported by lower oil prices and has been underpinned by household consumption. Euro-area growth is expected to continue to recovery gradually in line with oil prices and credit conditions. This growth is however, likely to be slightly weaker than previously predicted owing to downwards revisions following activity in Greece. In addition to this, the current economic climate in China may impact on predictions for the next quarter given the potential for a reduced contribution to global GDP. CPI, which fell back to 0.0 in June, has risen to 0.1 in July. The Bank Rate has been maintained at 0.5 in August following its increase in July. The reasons for the ongoing failure to meet the 2 target for CPI have been assigned to the drop in oil prices and energy costs in general, as well as food and imported goods. The Monetary Policy committee (MPC) continues to set policy to meet the 2 inflation target in a way that cares for and encourages economic recovery within 2 years. The MPC still considers that this will be met within the time frame. Source: Bank of England, Quarterly Inflation Report, August

5 GDP, CPI & RPI Movement predictions MOVEMENT 2016 MOVEMENT 2017 MOVEMENT 2018 MOVEMENT 2019 GDP growth () CPI () RPI () Sterling index (Jan 2005 = 100) (HM Treasury) Official Bank rate (annual average, ) (HM treasury) *Movement relates to the predictions from the previous quarter 3.2 RPI LOOKING BACK RPI FORECAST RANGE

6 Retail Prices Index Inflation Forecasts HM TREASURY Q Forecast Forecast 2016 Average Average PERCENTAGE Beacon Economic Forecasting Cambridge Econometrics Capital Economics CEBR Citigroup Commerzbank Experian Economics FORECASTER Goldman Sachs ITEM Club Liverpool Macro Research NIESR Oxford Economics RBS Global Banking and Markets Inflation continues to be very low but this may assist in boosting spending in the short-term. SARAH DAVIDSON DIRECTOR OF RESEARCH & DEVELOPMENT

7 Tender Price Forecasts Annual Inflation Rates According to the Building Cost Information Service (BCIS), tender prices increased between 6 and 9 in It is predicted that annual price increases will moderate in as contractors start to cope with increasing workloads. Tender prices rose by 0.8 in Q1 compared with the previous quarter, and by 4.5 compared with the same quarter in ANNUAL INFLATION RATES OFFICE OF NATIONAL STATISTICS Q Over the year to Q3 2016, BCIS predicts tender prices to rise by Over the remaining part of the forecast period, tender prices are expected to rise between 4.5 and 6. Gleeds anticipates tender prices to rise over the next few years at a UK average rate of: PERCENTAGE INDEX 4.8 between between between between Consumer Prices Index Percentage CPI change 0.00 Retail Consumer Prices Prices Index Index (all items) CPI Base percentage RPI Retail Prices Index Jervons (all items) (all percentage times) percentage change RPIJ Consumer Retail Prices Prices Index Index Jevons CPI (all Base times) percentage change Retail Price Index (all items) RPI Base Retail Prices Index Jervons Jevons (all times) RPIJ Base Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul MONTHS

8 Construction Production & Orders Looking at output and orders, the ONS reports that: CONSTRUCTION OUTPUT - DIFFERENCE BETWEEN Q (PEAK) AND Q2 There was a 0.2 increase in all construction output in Q2 compared with the previous quarter, reversing the decline of the previous two quarters. The increase over 12 months currently stands at 2.4. Despite this, the value of all construction work this quarter remains 4.07 below the pre-economic downturn peak of Q ,000 20,000 20,550 19,934 Q Q2 All new work in Q2 increased by 1.0, with private new housing, infrastructure and public other new work increasing by 3.9, 0.5 and 1.2 respectively when compared with Q1. million 15,000 10,000 All repair and maintenance in Q2 (when compared with Q1) decreased by 1.2 with public housing repair and maintenance and non-housing repair and maintenance falling 0.4 and 3.9. Should the assumption of a relationship between GDP growth and construction output prove correct, output may slow in associated with a slowing in the growth of GDP. 5, ,321 Public New Housing 5,462 5,828 Private New Housing 2,382 3,817 Infrastructure 2,164 2,308 Public Other Work 1, Private Industrial 8,404 SECTORS 5,683 Private Commercial All New work 1,831 1,798 R&M Public Housing 3,958 4,053 R&M Private Housing 6,433 5,692 R&M Non Housing

9 Change in Output Figures for the Main Construction Sector Private Housing R+M 2.4 New Private Housing New Infrastructure 1.2 New Public Non-housing A comparison of output activity between Q and Q2 reveals that: All work is down by 4.07 Infrastructure is up Private commercial is down by New Private Industrial -0.3 New Private Commercial Percentage change refers to Q1 to Q2-0.4 Public Housing R+M -2.5 New Public Housing -3.9 Nonhousing R+M New private housing is up by 6.70 Private industrial is down by New public housing is up by Repair and maintenance is down by 5.62 Other new public work is up by 6.65

10 Value of Orders for New Construction in Great Britain According to the ONS, the total value of construction orders in Great Britain was 20.7bn in Q1, down 7.53 on Q4 2014, but 9.17 up on the same quarter in 2014 (Q1 2014). Comparing Q1 with Q4 2014: PUBLIC & HOUSING ASSOCIATION PRIVATE HOUSING OTHER PUBLIC PRIVATE INDUSTRIAL PRIVATE COMMERCIAL INFRASTRUCTURE UK Employment Unemployment increased slightly in Q2 from 5.5 in the previous quarter to 5.6. The rate is however still lower than in the same quarter in 2014 (6.3). Reflecting this, the employment rate changed very little over the quarter but is up on 12 months ago. The Bank of England estimates the long-term equilibrium unemployment rate at 5. RICS calls this recent stagnation a temporary blip and expects employment rates to continue to rise for the rest of the year. Average weekly earnings (including bonuses) in the construction sector have risen 3.5 over Q2 compared to the same quarter in It is estimated that the government s new National Living Wage will have limited impact on wages and labour demand, as companies will adjust by responding in other ways than increasing prices UNEMPLOYMENT AVERAGE WEEKLY EARNINGS 2014 LONG-TERM EQUILIBRIUM UNEMPLOYMENT RATE

11 Market Reports The Q2 RICS Construction Market Survey reports that workloads are continuing to rise across all sectors and in all of the UK. The private sector again was the main driver of growth for Q2 with activity in both new work and repair and maintenance rising considerably. 58 of contributors to the survey saw a rise in private commercial sector activity. This is consistent throughout England, Wales, and Scotland, while the pace of growth in Northern Ireland remains more modest. There was a 51 reported rise in workloads associated with the private housing sector across all areas of the UK. Public housing also saw a rise in activity with 22 reporting growth, compared to just 10 in the previous quarter. Construction Market Survey Q2 UP RISE PRIVATE SECTOR UP 51 Industrial activity growth was strongest in the Midlands and North of England with 31 reporting growth in the sector. Infrastructure and public non-housing activity is on the rise in all areas except Northern Ireland where the recent standoff over public sector budgets is reportedly delaying project starts. The road and rail subsectors are expected to be the major contributors to infrastructure growth for the year to come. A limit is put on the potential for growth due to considerable skill shortages as well as financial constraints. 59 of respondents reported that their productivity was limited by labour shortages, with a lack of bricklayers causing particular difficulties. This was most felt in Scotland and London and is expected to continue throughout, impacting on employment growth and wages. 31 GROWTH Variable costs of materials are causing some problems in terms of project management. Shortage of materials is easing, with 40 of respondents reporting shortages here 40 compared to 60 in Q1. DOWN FROM 60 The Q2 RICS UK Commercial Property Market Survey results continue to paint a robust picture of the commercial real estate sector s health, with strong demand from investors and occupiers alike showing no sign of waning. These firm trends are helping to push capital value and rental expectations higher both in the near term and further out. RICS UK Commercial Property Market Survey Q2

12 Construction Output Summary of Forecasts EXPERIAN SECTOR CONSTRUCTION OUTPUT YEAR Q3 Q2 Q2 MOVEMENT Q3 Q MOVEMENT PRIVATE HOUSING Q PUBLIC HOUSING MOVEMENT BCIS TOTAL NEW WORK CONSTRUCTION PRODUCTS ASSOCIATION

13 Construction Output Summary of Forecasts (cont d) EXPERIAN SECTOR INFRASTRUCTURE YEAR Q3 Q Q3 Q PRIVATE INDUSTRIAL MOVEMENT Q3 Q2 MOVEMENT PRIVATE COMMERCIAL MOVEMENT BCIS PUBLIC NON-HOUSING CONSTRUCTION PRODUCTS ASSOCIATION

14 Regional Reports Reports from our regional offices suggest that in the main business confidence continues to improve and the outlook for construction workload across most of the UK is positive. Tender prices have continued to rise as a result of the increase in demand on labour, materials and contractor profit margins. Our sources indicate the shift from single to two-stage tendering or negotiated contracts continues. Contractors are generally more selective about project opportunities, naturally opting for those with less risk and potentially higher margins. St Pancras Renaissance, London Gleeds regional offices report as follows: Galvin Tarling Reporting on the Eastern Region Paul Sweeney Reporting on the Greater London Region Construction activity varies across the East of England. Activity in Cambridge is reportedly overheated and, whilst the commercial market in Norwich is beginning to move, Ipswich remains depressed. Tender prices remain competitive with average preliminaries sitting at circa 14. The availability and quality of labour remains adequate with an apparent steady flow of migrants. Workload security is good with the volume of tenders increasing. Shortages are reported for masonry materials, which has an impact on construction pricing. The outlook for the region remains positive and construction workload as well as costs are expected to increase over the next quarter. In our previous quarterly report, we advised that construction activity in the region was steady and competitive. The London market is predicted to remain buoyant to the end of this year and most probably into There has been a wholesale shift away from single stage tendering towards more risk averse two-stage tendering over the last 18 months. Obtaining a single stage tender for anything above 10m is proving difficult unless dealing with new contractors to the market where perhaps workload and cashflow are important more so than initial profit. Contractors appear to be more risk aware and to minimise organisational liability we could see the re-emergence of management forms of contract, changing the risk transfer profile. The key inflationary driver is labour, which is currently insufficient to meet demand. Commodity prices globally (particularly of steel and copper) have been falling, and continuing shortages of bricks, cladding system and M&E equipment are inflammatory to the situation. Main contractors are very choosy over which contracts (and which clients) to tender in order to ensure they keep their suppliers keen and on board. In our previous quarterly report, we noted that some of the delays due to planning and funding issues were beginning to ease and that the residential sector was experiencing high demand. More predictable tender returns had begun to replace some of the volatility in the market.

15 Regional Reports Ross Evans Reporting on the Midlands Region Steve Green Reporting on the North East, Yorkshire & Humberside Region The construction industry in Birmingham remains competitive with average preliminaries of around 12. Supply chains though continue to be restricted due to increased workload and decreased capacity. Nottingham reports ongoing insufficient labour (particularly skilled labour), impacting on competitive tender pricing. Average preliminaries are slightly lower than Birmingham at around 10 (this is however project specific and a general indicator only). Contractors are becoming increasingly selective in which projects they tender for. Added to this is an increased dropout rate, with would-be bidders citing lack of resources for the project at some point during the tender period. Masonry shortages across the region continue. In our previous quarterly report, we reported that the labour shortages in the region were becoming problematic and material and labour costs were increasing. The construction industry in the North East remains extremely competitive with an increase in number of tenders over the quarter. However, Leeds reports a labour shortage and advises that the industry is currently experiencing some instability despite buoyant workloads. It is felt that bankruptcies have increased over the quarter. New projects are being commissioned with reasonable margins, but this is negated to some extent by legacy contracts, which are now proving uneconomic and problematic to complete. This is compounded by insolvency with sub-contractor supply chains resulting from similar legacy contracts taken during the recessionary period. Bricks are in short supply across the region and some types of facing bricks are still on extended delivery periods due to previous supply cutbacks. Timber, stone cladding and paving materials are being imported. Contractors are requesting extended tendering periods for many projects and some instances declining to bid for single stage D&B projects, preferring two-stage procurement instead. In our previous quarterly report, we considered that the market was competitive but that some city centre developments were experiencing delays due to planning issues. Contractors were becoming increasingly selective towards tendering opportunities and long lead-in times were evident due to material (namely brick) shortages. Queen Elizabeth Hospital, Birmingham Ross Savage Reporting on the Northern Ireland Region Research from the latest edition of the Northern Ireland Construction Bulletin notes that in Q1 : The total volume of construction output increased by 6.5 compared with the previous quarter and was 13.8 higher when compared to the same quarter in Looking at movement in sector activity: New work increased by 6.5 Repair and maintenance increased by 6.7 Other work increased by 18.7 Housing decreased by 4.6 Infrastructure increased by 9.6 In Q4 2014, construction output was at 99.8 of the average output reported for In the same quarter, overall construction output in Great Britain was at of the average output for Growth in Northern Ireland is lagging behind the rest of the UK due to delays to public sector developments. In our previous quarterly report, we considered that output had increased by 3.9 over the quarter.

16 Regional Reports Liverpool School of Tropical Medicine The Helix, Glasgow Alex Halliday Reporting on the North West Region Brian Stevenson Reporting on the Scotland Region Construction activity across the region has continued to increase during the quarter. Projects previously placed on hold are now starting to progress and a number of sites are undergoing development. Shortages of masonry products, concrete, plasterboard and steel are impacting on cost. Concrete frame costs have increased by about 10 in the last year due to the level of demand. The price increase has meant that smaller and sometimes more costly concrete frame suppliers are now winning work alongside the major concrete frame suppliers. Looking forward, workload security is an unknown entity and this provides an element of uncertainty in an otherwise buoyant region. In our previous quarterly report, we noted continued improvement across the industry with the expectation that labour may become scarce over the summer months. Construction market activity has been increasing, but the capacity to meet the demand is starting to lag behind. This is evident by both main and sub-contractors becoming ever more selective as to which projects they are prepared to pursue. Tender prices are generally on the rise, with some tenders showing great variance between the lowest and highest tender price, as confidence within the market returns. The volume of tenders has also increased and this growth is expected to continue over the next quarter. However, optimism within the industry remains guarded given the highly competitive nature of tender pricing and the number of projects which are still awaiting the green light to become live. Brick and block shortages are becoming evident with lead-in times of up to six months on some projects. This may be partly caused by the returning confidence in the housing market with many developments now progressing. There still appears to be a shortage of contractor estimating and procurement staff, with many tendering periods having to be extended beyond what would be expected and again companies being more selective over the potential opportunities. Demand for site labour (skilled and unskilled) is buoyant, but is currently being met by the migrant population; however, it is uncertain whether this is sustainable. In our previous quarterly report, the difficulty in securing sub-contractors was reported due to increased selectivity when pricing projects. This is an implication of ongoing skills and material shortages.

17 Regional Reports Bristol Civil Justice Centre, Bristol Matthew Quirk Reporting on the South West Region Richard Hine Reporting on the South East Region The ongoing buoyancy of the housing market is proving a big driver in the availability of construction resources in the South East. The buzzing construction industry is placing pressure on both contractors and sub-contractors. With a number of contractors having secured almost full order books many are struggling to obtain supply chain engagement. This may result in the return of cover pricing, notably on projects that are less attractive. Other sectors of the construction industry are beginning to bounce back with current construction indicators signalling growth not only in housing but also in commercial, infrastructure and civil engineering sectors. The government s future spending programmes should help benefit this sector. The biggest challenge will be the shortage of skills and resources throughout the region. In our previous quarterly report, we noted the trend away from competitive single stage tendering and the increased selectivity of contractors. Despite this, the region has enjoyed a period of recovery in the residential, commercial, infrastructure and civil engineering sectors. The outlook for the South West is constantly improving with increasing workloads. The number of clients requesting cost advice is growing and there is a definite increase in schemes being tendered. Average preliminaries are around 13. The increased workload in the area has meant that contractors are becoming more selective about the projects they tender for. Unless a project is straightforward with minimal associated risk, then contractors are generally not willing to tender on a single stage lump sum in direct competition. There has been a notable increase in two-stage and negotiated tenders over the last quarter. During the second stage tender, main contractors are in some instances struggling to obtain multi competitive quotes for major sub-contract package. This is especially noticeable for dry lining/plastering and brick/ blockwork packages. There are contractor reports of specifically pricing additional risk in their tenders for subcontractors quoting for packages and then subsequently either turning down the work or not standing by their original price. The year ahead is expected to continue in this vain and provide additional opportunities for growth across the region. In our previous quarterly report, we noted an increasing workload across the region and increased contractor selectivity. The lack of competition for sub-contractors in the consolidated market was causing price hikes and the shortage of bricklayers was ongoing.

18 Regional Reports Childrens Hospital for Wales, Cardiff Nigel Watkins Reporting on the Wales Region The construction Industry in Wales is competitive. However, a skills shortage still exists across the region. Lack of stock of bricks and doors is leading to longer order periods. A number of materials are being imported, including granite and natural stone pavings, window systems, specialist finishes, and large format glazing or cladding panels. Construction output is likely to increase quite considerably over at least the next 2 years, following a period of unprecedented low interest rates. The local market will potentially suffer from insufficient numbers of large contractors able to fulfil the workload requirement. As the local market is always keen to stick with who it knows best, a number of key contractors are reaching saturation point in terms of capability. In our previous quarterly report, we saw that a number of large projects are planned for Wales and were expected to affect the supply of labour and materials across the region.

19 Acknowledgements Thank you to the following: For additional information contact: (All data current as at 24 August ) New Orders in the Construction Industry, Office of National Statistics Forecasts for the UK Economy, HM Treasury Northern Ireland Construction Bulletin Labour Market Statistics, Office of National Statistics Consumer Price Indices, Office of National Statistics Inflation Report, Bank of England BCIS Quarterly Briefing Output in the Construction Industry, Office of National Statistics Experian RICS UK Construction Market Survey RICS UK Commercial Market Survey Sarah Davidson Gleeds Corporate Research & Development Wilford House, 1 Clifton Lane, Nottingham, NG11 7AT Tel: sarah.davidson@gleeds.co.uk Key ONS: Office for National Statistics HM: Her Majesty s Treasury BCIS: Building Cost Information Service RICS: Royal Institute of Chartered Surveyors gleeds.com Follow Legal disclaimer: This paper was prepared by Gleeds to advise on the construction market. It is for general information only and neither Gleeds nor any of their partners, employees or other persons acting on their behalf makes any warranty, express or implied and assumes any liability with respect to the use of the information or methods contained in this report to any person or party. This document is subject to copyright and may not be reproduced without permission from Gleeds Research and Development, randd@gleeds.co.uk