In our regular overview of construction economics, E C Harris examines the potential for future growth in the industry Continued falls in the value of equities, the possibility of a double dip in the UK economy and the threat of war with Iraq have all continued to make private-sector construction clients nervous. Labour shortages are the cause of local difficulties and material prices have started to rise again after a long period of restraint.
Buoyed by continued spending in the infrastructure sector, and by further planned investment in health and education, the forecast is that tender prices will rise by 3.5 per cent in the year to third quarter 2003, with a further 3.2 per cent increase the following year.
In London, continued high labour costs and increased levels of activity should see building tender prices rise by 4.8 per cent during the next year and by a further 4.2 per cent in the year to third quarter 2004.
The rate of increase of contractors' input costs increased substantially during the third quarter of the year, with materials costs up by 3.2 per cent in the quarter. Labour rates are 4.2 per cent higher than three months ago, with London bricklayers on £143 per day compared with daily rates of £95 in South Wales, for instance.
Problems in the supply of reinforcement from within the UK have seen rebar prices increase by 16 per cent during the past three months, although prices may be forced higher still by the imposition of a tariff on imported steel. Despite difficulties in recruiting skilled labour, DTI figures show that the number of employees in construction during April was 8 per cent higher than in April 2001.
Tender prices are forecast to rise by at least 5 per cent during the next year and a further 3.8 per cent during the following year, on the back of an increasing workload for infrastructure across all sectors. The value of new orders for 2002 is forecast to rise by 10 per cent compared with 2001.
New orders for roads were worth £1,100 million in the first half of this year, compared with £1,500 million for the whole of 2001, and the Highways Agency has announced new road targets for this year and next.
The water sector is now in the thirdyear boom period of its five-year periodic cycles and there are reports of skill and resource shortages. The need for intense activity in the road and rail maintenance sectors heightens on a daily basis.
With the peaks of the different sub-sectors coinciding, labour and materials availability is already starting to suffer and, notwithstanding the long-term deals that have been established, shortages of resources will be the key driver in determining future tender price levels.
Output figures in the second quarter were 1 per cent higher than the first quarter and 7 per cent higher than the second quarter 2001, with new work up by 9 per cent, year on year, and refurbishment and maintenance work up by 5 per cent.
New construction orders in the first half of this year were 2.4 per cent higher than in 2001. Rises were seen across most sectors, although private industrial and private commercial both fell - by 24 per cent and 1 per cent respectively. While the 1 per cent fall in private commercial orders can be interpreted relatively optimistically - given the poor prevailing economic climate - the fall in private industrial was to its lowest level since 1993.
The continued rise in house prices shows no signs of abating, with the latest Halifax price index up by 18.8 per cent on the August 2002 figures; the Nationwide figures show an even higher year-on-year increase, of 23 per cent. Despite some slowdown, construction output in the private housing sector is expected to rise by 6 per cent this year, slowing to 1 per cent in 2003, before falling by 2 per cent in 2004.
The main forecasters of construction activity are predicting continued rises in output during the next two years. Construction Forecasting and Research (CFR), in its summer 2002 forecast, is predicting that output will rise by 3.8 per cent in 2002, 3.2 per cent in 2003 and a further 2.2 per cent in 2004. The Construction Products Association forecasts output growth to average 3.5 per cent per annum through to 2004.
The repair and maintenance sector continues to benefit from higher spending on schools and health, and the shift of ownership of former local authority housing into the ownership of Registered Social Landlords that are undertaking major refurbishment programmes.
According to CFR, there should be a steady rise in the public non-residential sector of 8 per cent this year, followed by 6 per cent in 2003 and 2004 as spending on health and education rises. The main threat to the sector is the possibility of the government not delivering on its commitments if an economic downturn curtails the availability of cash.
The private commercial sector, which accounts for approximately one third of all new work, is expected to show a flat performance. Offices are expected to perform poorly, although spending on retail schemes should rise.
Continued high levels of construction activity mean that input costs are increasing, specialised subcontractors are able to pick and choose and tender prices continue to rise. Contractors remain optimistic and, with order books remaining full, negotiation of prices remains difficult. Looking further ahead, increasing numbers of contractors are securing long-term relationships with chosen clients.
Long-term workload for London includes further phases of Canary Wharf, the continued development of Paddington Basin, Terminal Five, the Channel Tunnel Rail Link and, surely at some time in the next couple of years, the redevelopment of Wembley Stadium. The speculative London office market has very much contracted, with developers only going ahead after securing pre-lets. Unlike the last office boom, however, the 'spec' office market is now a much smaller percentage of the whole and the downturn has not had such a deleterious effect.
Macro economic factor
A survey in August of independent analysts indicates growth in the UK economy of 1.7 per cent this year, rising to 2.7 per cent in 2003. Underlying rates of inflation are expected to remain within government targets, with year-on-year increases of 2.2 per cent this year and 2.4 per cent in 2003.
Interest rates are unlikely to change this year. However, any military action in the Gulf would have a detrimental effect on the UK and world economies, as oil prices would be driven up and any economic recovery in the US - which is already facing the possibility of a 'double dip' - would be hit.
Notwithstanding the latest depressing news from the London Stock Exchange, the UK economy remains basically sound and is better able to cope than those of the US and many European countries.
Paul Moore is an associate and head of the cost research department at EC Harris. E-mail paul. moore@echarris. com
Construction output in the second quarter of this year was 1 per cent higher than the previous quarter and 7 per cent higher than the second quarter 2001.
Construction output is forecast to increase by 3.8 per cent this year, by 3.2 per cent in 2003 and by 2.2 per cent in 2004.
Skilled labour rates are up by 8.6 per cent nationally during the year to September 2002.
Materials prices rose by 6.2 per cent for the year, although difficulties in procuring reinforcement forced rebar up by 13-16 per cent in the same period.
Commercial and industrial sectors face a slowdown. Infrastructure output is forecast to rise by 25 per cent between 2001 and 2004.
Refurbishment and maintenance output is forecast to rise by 3.5 to 4 per cent for each of the next three years.
Tender prices are forecast to rise nationally by 3.5 per cent during the next year and by 3.2 per cent during the year to third quarter 2004.
Tender prices in London are forecast to rise by 4.8 per cent during the next year and by 4.2 per cent the year after.
Civils tender prices are forecast to rise by almost 5 per cent during the next year with a further 3.8 per cent rise forecast the year to third quarter 2004.
The underlying rate of retail price inflation is expected to run at 2.1 to 2.4 per cent for the next five years.
Economic growth in the UK is forecast to rise by 1.7 per cent in 2002,2.7 per cent in 2003 and 2.3 to 2.7 per cent for the following three years.