Construction output and contract awards are up year-on-year, but there are key issues facing the sector

Noble Francis

As we approach the summer, construction finds itself in a curious situation; things are quite sunny at the moment but there are also some dark clouds. Construction output in March was 2.4% higher than a year ago and the CPA/Barbour ABI contract awards index was at 143 in April, 2% higher than a year earlier and indicating further growth in the next few months. However, there are some key issues facing the sector that will have a significant impact in 2017 and 2018. Currently, the industry is facing a shortage of quality skilled trades and managerial staff. This is leading to substantial wage inflation. In addition, the industry is also facing sharp rises in materials and product costs, due to the depreciations in sterling in the second half of last year. But while costs rose, contractors reported in the Construction Trade Survey that tender prices remained flat in Q4 2016 and Q1 2017. As a result, margins fell in the last six months and clearly this isn’t sustainable medium term.

Commercial office sector index: Uncertainty takes its toll but demand remains strong

Offices construction on site remains high and the CPA/Barbour ABI commercial offices index was at 115 in April, 2% lower than in March but 13% higher than a year ago. New contracts in the sector continue to recover from the sharp falls that occurred in the second half of 2016 due to a rise in investor uncertainty post-referendum, when there were already concerns about the offices market peaking. The uncertainty has impacted on internationally-funded towers in central London for the financial services sector.

We have already seen signs of banks and insurers starting to move operations to other EU countries. Goldman Sachs announced that it will be moving “hundreds of staff” to Frankfurt and Paris, Lloyds of London will be opening a subsidiary in Brussels, and JP Morgan is purchasing more office space in Dublin. Despite this, demand for offices in the technology, media and telecommunications sector remains robust and, outside of the capital, activity is strong in cities such as Birmingham, Sheffield and Manchester, as firms relocate head offices out of central London.

Noble Francis is economics director at the Construction Products Association

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