The Future of Construction
Whether it’s because of the potential results of a disorderly Brexit, the possible effects of a full blown China-USA trade war, or an escalation in geo-political tensions, there can be little doubt that the prospect of a downturn or recession is becoming an ever greater concern for businesses in all industries, construction as much as any other.
Any such nervousness is perfectly understandable, since the increase in the mainstream media's references to 1) Brexit 2) a possible recession 3) more Brexit and 4) even more Brexit have been escalating at such a level that by now almost all other news has been drowned out, leaving us (OK maybe just some of us) with a negative expectation for UK construction output in 2019. But is this right? It may be stating the obvious, but it is safe to say that construction's fortunes are heavily influenced by wider economic conditions, so, when general optimism is high, investment levels are too, and this feeds directly into new construction orders. It follows, therefore, that the reverse effect occurs when recession looms. So, is the UK facing a recession in 2019? We might be forgiven for thinking the chances are high, given the tone of the current news coverage. Of course, nobody really knows, but maybe the experts can help us formulate a clearer picture.
On the assumption that the UK and the EU smoothly transitions to a broad free trade agreement post Brexit, the IMF, in its November UK Country Report, projected that UK growth would remain at “....around 1½ percent going forward.” In December, after surveying leading international economists, Bloomberg reported that “... economists put the chances of a recession in the coming year at 15 percent in the U.S. and 18 percent in the euro zone ....... Even the Brexit-battered U.K. economy is only at a 20 percent risk....” 20 per cent is still too high for comfort, but, nonetheless, the chances of recession next year are just one in five, based on the Bloomberg analysis.
Nevertheless, commentaries from the likes of Bloomberg can only offer us insights at a macro level, they don't 'drill down', so to speak, into the specific prospects for UK construction. So, what do our own industry's forecasts tell us about the year ahead? Fortunately, we are well-served by a wide range of surveys covering the different sub-sectors. With the caveat that they provide only a snapshot of opinion at the time they were written, the following key extracts from some of the industry's recent reports help to lift the fog a little ....
RIBA Future Trends Survey (published 29th November 2018)
In the commentary for the latest RIBA Future Trends Survey, Executive Director, Members, Adrian Dobson, said, “Commentary received from our participating practices suggests that demand for architectural services is continuing to remain stable with less of a divide across the regions.
“However, the overall picture seems to be one of a market that is lacking growth momentum. The economic unease generated by the on-going and increasing uncertainty around Brexit remains.
“With the value of work in progress declining and economic anxiety clouding the willingness of clients to commit to projects, Brexit continues to be a big impact on architects’ confidence.”
Further information here.
In its separate 'Business Benchmarking Report 2018' (published December 2018), the RIBA provides a wider picture of the sector's current fortunes, reporting, “Key 2018 benchmarks of RIBA Chartered Practices business performance show a profession which is continuing to grow. Total staff employment and total revenue are both higher than 2017.....” The report can be downloaded here.
RICS UK Construction and Infrastructure Market Survey - Q3 2018 (published 18th October 2018)
“....Workload and employment expectations for the year ahead have eased but remain generally positive.......
“…...A less sanguine, and more uncertain, outlook for the economy as a whole has led to a reduced optimism for the construction sector over the year ahead. Even so, 33% more contributors expect activity to rise rather than fall, down from 41% in Q2, and a net balance of 25% foresee an increase in hiring.....”
Full report here.
Home Builders Federation (HBF) / Glenigan - Housing Pipeline Report (published 23rd October 2018)
Planning permissions submitted and granted represent a key indicator of future housebuilding activity and the latest HBF / Glenigan Housing Pipeline Report offers a forward-looking guide to activity in the sector in 2019 and 2020. Commenting on the latest report (covering Q2 2018), Stewart Baseley, executive chairman at HBF, said, “..... The fact that permissions are now running at over 350,000 a year shows that builders are investing in the land, and people needed to deliver more homes. If we are to get to 300,000 homes a year, we need to see consistently high levels of permissions being granted, and then crucially, processed efficiently .....”
Glenigan’s Economics Director, Allan Wilen, also commented, saying, “The residential development pipeline remains strong, despite a second quarter dip in residential unit approvals from the historically high levels seen over the last year. Indeed, the number of projects securing approval was up 17% on a year ago as permission was granted for more, smaller sites.”
Full information and link to download full report here.
Builders Merchant Building Index (BMBI) Q3 2018 (published November 2018)
By monitoring merchant sales, the BMBI provides a reliable measure of activity in the Repair, Maintenance & Improvement (RMI) sector and this has remained consistently positive throughout the year. Headlines accompanying the monthly and quarterly data releases for the Index included: A good start to 2018 for merchants; Merchants up in February; Small growth for merchants in Q1; Merchants value sales up in May; 'Merchants’ sales break records in July; Stronger second quarter for merchants; Positive summer for builders’ merchants’ sales; BMBI reports August sales boost; Sales value growth continues in Q3.
Whilst the trend throughout 2018 appears positive, projecting a similar performance in 2019 is, unsurprisingly, difficult. Commenting on the BMBI Q3 results and the near-term outlook, John Newcomb, CEO of the Builders Merchants Federation, said, “Builders’ merchants’ sales continue to show value growth, but there are one or two indicators within the wider market that we need to note going forward including rising costs for labour, fuel and raw materials. In addition, the merchants’ main customer base, SME builders, depend on continued consumer confidence to progress domestic RMI work. Uncertainty over Brexit is a common thread between all of these factors and, unfortunately, no one can predict what the final agreement will be.”
Builders / SME Contractors
The Federation of Master Builders (FMB) 'State of Trade Survey Q3 2018' (published October 2018)
The FMB's quarterly State of Trade Survey is the only one to focus exclusively on SME firms: the typical responding firm is a general builder or building contractor employing ten or fewer people, and having a turnover of between £100,000 and £500,000 p.a.
Regarding the 2019 outlook, the Q3 Survey reported, “Expectations for the future have become weaker with 36% of respondents forecasting higher workloads, down from 46% in the previous quarter. In contrast, those predicting no change to workloads grew, to 51% from 41%.”
Brian Berry, the FMB's Chief Executive said, “The third quarter of 2018 saw a slowdown in growth within the UK’s small and medium-sized (SME) construction sector. With fewer than six months until Brexit, expectations for the future have also become slightly more pessimistic in comparison to the previous quarter....... However, despite Brexit nerves and rising costs, the construction SME sector is still growing, which demonstrates the resilience of our industry.”
The full report can be downloaded here.
BC Live League Table (published November 2018)
The BC Live League Table is produced by The Builders Conference, which provides the industry with monthly data on contract awards. Throughout 2018, the commentary headlines accompanying the release have remained consistently positive, including:
Stubbornly Consistent - "Amidst rumours of a steady decline in the UK construction industry, the statistics from the latest BCLive league table once again suggest otherwise."
Impressively Impervious – “Despite the vagaries of economic fluctuations and geopolitical uncertainty, the UK construction sector appears to have developed a much-needed consistency in recent months.”
More of the same – “The monthly volume of UK construction contract awards during 2018 has become so predictable that there’s a danger of complacency.”
Seemingly Impervious – “As the UK construction sector racks up its eighth consecutive month in which the value of new contract awards exceeded £4 billion …..”
Crisis, What Crisis? – “The seemingly ceaseless machinations over Brexit continue to divide opinion and add to the financial uncertainty while the trading of tariffs between the US and China further undermine the global economy. Meanwhile, the UK construction industry has just delivered its largest monthly contract awards total in more than 12 months .....”
In November's release, the commentary gave a nod to the uncertainty surrounding the industry's prospects, running with the headline 'Confused? You will be'. In his explanation, Builders' Conference CEO, Neil Edwards, explained, “The fact that the BCLive league table topped the £6.0 Billion mark for the second month in succession is surely cause for celebration. But the facts underlying those figures are complex, confusing and – in many instances – counter-intuitive ....
“.... for the second consecutive month, it topped the £6.0 Billion mark to pour scorn on the notion of a pre-Brexit market meltdown and an industry on the brink of a crisis. Lurking just below those figures, however, is a picture that is as confused as it is buoyant.”
The full commentary with links to the data can be accessed here.
Markit/CIPS UK Construction PMI® (published December 2018)
The monthly Markit /CIPS UK Construction PMI (Purchasing Manager's Index) surveys are closely watched, as they are forward-looking and provide valuable insights into near-term future activity in the industry. The latest data was released under the upbeat headline 'Construction Growth Reaches Four-Month High in November' and the commentary explained, “November data pointed to a solid expansion of UK construction output, which was supported by a broad-based upturn in the three sub-categories of activity monitored by the survey. Growth of new work picked up since October and rising client demand underpinned a robust and accelerated expansion of employment .....”
Whilst survey respondents had noted that 'Brexit-related concerns had weighed on their growth projections for the next 12 months', the commentary also explained that latest data indicated that business optimism across the construction sector had rebounded from the near six-year low seen in October. Moreover, the latest reading signalled the strongest degree of confidence for three months.
The full commentary can be seen here.
Barbour ABI - ECMR - Economic & Construction Market Review (published November 2018)
Created using its own construction project data, Barbour ABI's ECMR provides a valuable, forward-looking analysis of probable future activity, based as it is on planning permissions submitted and granted. Consequently, the Review provides a monthly round-up of the construction industry with insight, market analysis, forecasts, trends and statistics.
The latest Review, having been published in November, is indicative of likely activity in 2019 and 2020. It revealed that the value of new construction contracts in October had decreased by 3.8% month-on-month reaching a total value of £5.4 billion and, in line with many of the surveys and forecasts, Brexit was cited as a contributing factor. Housebuilding was highlighted as one of the industry's strengths, continuing to prop up the industry with £2 billion worth of contract value.
Commenting on the figures, Michael Dall, Lead Economist at Barbour ABI, said, “There is no doubt that the strength of housebuilding is substantially helping improve the overall figures for the construction industry. With a shortage of homes across Great Britain and an influx of buyers helped by schemes such as help-to-buy has propelled the sector and kept developers busy to keep up increasing expectations to build more homes. Nevertheless, as Brexit continues to be discussed and negotiated, the lack of clarity on the matter for the remaining sectors seems to have influenced the total amount and value of contracts.”
The release and link to the latest review can be accessed here.
Glenigan Construction Outlook – Forecast for 2019 & 2020 (published July 2018)
Back in the summer, construction project information providers, Glenigan, published their forecasts for 2019 and 2020, predicting that “.... project starts are forecast to decline by 2% in 2019 before recovering 3% in 2020.” With the now very familiar Brexit caveat, the commentary stated that “Whilst overall starts will decline for a third consecutive year in 2019, logistics premises, build to rent, student accommodation and social housing, secondary education and community & amenity are forecast to be growth areas .....
“..... This outlook for the industry is critically dependent upon the realisation of a Brexit agreement and the planned transition period. A no-deal Brexit would have a disruptive impact on the UK economy and construction activity over the forecast period.”
The full report can be downloaded here.
Darren Jarvis is the Director of ConstructUK.com, the UK construction industry's online compendium of sales and marketing information, which hosts hundreds of articles and news stories, details of more than 1,000 construction events and over 30 downloadable databases. Visit: www.constructuk.com