The mixed signals on the UK economy are reflected in the construction industry, where spending plans over the next couple of years are very much dependent on investment in infrastructure, health and education.
Any slowdown in the UK economy will lead to a slowing in the release of funds or increased taxation, either of which would adversely affect construction spending.
Notwithstanding record-breaking output figures last year and a continued rise in output in the first half of 2003, the future looks more uncertain.
New orders in the second quarter of 2003 were 2 per cent higher than in 2002, but the breakdown shows a swing to infrastructure orders - up by 28 per cent on the same period last year and away from the private commercial sector - down 15 per cent. The commercial offices sector has been decimated in London, where new orders for the private commercial sector in the second quarter of 2003 were 30 per cent down on the previous quarter and 47 per cent down on the second quarter 2002.
Against this background the expectation is that building tender prices nationally will rise by 3.8 per cent in the year to third quarter 2004 and a further 3.6 per cent over the following year. Despite the fall off in London offices activity, there are a number of other major schemes within the M25 that are continuing to keep London contractors busy and create a cost premium on skilled labour rates in the capital. As a result tender prices in London are expected to rise by 4.2 per cent in the next year with a further increase of 4 per cent in the year to second quarter 2005.With rail, water and road spending all forecast to soar, civil engineering tender prices are expected to rise by 4 per cent in the next year with a further 3 per cent rise forecast to the third quarter of 2005; a squeeze on skilled labour could still push infrastructure tender prices considerably higher.
Input costs Contractors' input costs rose by 1.6 per cent in the past three months, to show an annual rise of 5.8 per cent compared with the third quarter of 2002. Materials prices rose by 3.8 per cent during the year with ready-mix concrete prices showing an increase of 4.5 per cent, and bricks and blocks up by 5.1 per cent and 7.5 per cent respectively.
Daily rates for skilled labour rose by 2.7 per cent in the past quarter, and by 8.6 per cent in the past year. The regional disparity in workload continues to be reflected in labour rates with a number of northern regions showing double-digit rates of inflation; daily rates in London, which stagnated during the second quarter of the year, bounced back to show a year-on-year rise of 6 per cent. In contrast labour rates in Wales have not moved, while in Northern Ireland daily rates fell by 5 per cent during the year.
Civil engineering There is growing optimism on infrastructure workload across all sectors and renewed vigour in the highways sector is attracting much focus. The water sector is now in the fourth year boom period of its fiveyear periodic cycle and there are already regular reports of skill and resource shortages.
In the rail sector, the end of the wrangling over the London Underground PPP has lead to approximately £2 billion of capital spend being let in the past six months, with a similar amount to be let during the next 12 months. As the project moves into implementation stage there is the potential for signalling and track resources to become scarce, driving up costs. Work on the West Coast Main Line, including blockades planned for the next two years, will further accentuate these scarcities.
Construction activity The outlook for the construction industry as a whole continues to be mixed. Construction output in the second quarter of 2003 was 5 per cent higher than the previous quarter and 7 per cent up on the second quarter of 2002, and already output figures for this year look likely to top the record output of 2002 Construction Forecasting and Research (CFR), in its summer 2003 forecast, is predicting output to rise by 4.7 per cent in 2003 slowing to 2.2 per cent in 2004 and 2.9 per cent in 2005, with a big increase in infrastructure spending of almost 20 per cent in the three years to 2005 and public sector works up by 40 per cent in the same period. In contrast, the private industrial sector is expected to follow the stony path of the past few years, with a fall of 8 per cent, while the private commercial sector, for so long the bellwether of the market, will fall by 4 per cent during the same period.
By no means having all its eggs in one basket, industry is going to be more reliant on investment in public sector works than it has been for a considerable time.Worries associated with pubic sector works include the failure by government departments to spend all of their budget allocations; despite increases in budgets, planned investment undershot by £2.6 billion last year as departments struggled to spend their share of increased funds.
Tender prices There is no doubt that the virtual shutdown of work on new London offices is having a profound effect on workload in the capital, and contractors are gloomier than usual.
However, there still remains a large portfolio of work on offer, the high quality residential market is very active, there is still interest in office fit outs while a good deal of the slack in offices has been taken up by major schemes: Terminal 5, Wembley, White City and the new Arsenal stadium, which will continue to create demand for contractors' services.
Labour rates in the capital are still high while contractors are still busy and tender enquiries do not always result in bids.
Workload figures look much better in the North. The North West region is leading the charge with a projected increase in output of 13 per cent this year and 10 per cent in 2004.
Reports from Liverpool indicate an upturn in confidence in the city, on the back of its 'City of Culture' status;
ambitious plans were already afoot for the redevelopment of Liverpool city centre and these now look much more likely to reach fruition.
The increase of PFI and PPP is having an effect on the whole of the construction industry, since it is putting more contractors into a situation where they are becoming more familiar with partnering arrangements and strategic alliances.
However, not all contractors are impressed with PFI procurement and some, who have had their fingers burnt in the past, are less willing to get involved in PFI schemes in future.
Against this, ProCure 21, which aims to batch NHS schemes valued at under £20 million, is due to come on stream in early 2004 and should see capital works of £1.4 billion coming onto the market.
Macroeconomic factors It looks increasingly as if the UK will emerge from the latest business downturn without technically going into recession, although the latest forecast by the independent forecasters, of growth of 1.8 per cent this year and 2.4 per cent during 2004, is well down on the chancellor's Budget forecast on which many of his spending plans were predicated.
Meanwhile, across the Atlantic, retail sales grew by a 6.3 per cent in the year to July, while the US economy in the second quarter is running at an annualised growth rate of 3.1 per cent. Closer to home, growth in the euro zone of just 0.5 per cent is forecast for 2003, recovering to 1.7 per cent in 2004.
Following an apparent easing in house-price inflation, the rate of rise is picking up again, with the latest Halifax figures showing August prices 19 per cent higher than a year before.
House-price inflation could be the stimulus needed by the Bank of England to raise interest rates from their current 48-year low.
Paul Moore is an associate and head of cost research at EC Harris. Email paul. moore@echarris. com