Putting these latest figures aside, demand in the construction industry weakened in the second half of 1998 as the UK economy teetered on the brink of recession. But the industry bounced back with a modest recovery in the first quarter of this year, despite economic problems in the Far East. Recent surveys into consumer and business confidence show fears of a serious recession have faded.
Tender prices
Over the past 12 months, tender prices have risen 6%, and, in the first quarter of 1999, they rose 1.6% on the previous quarter.
Tender prices in London and the South-east rose 12% over the year to the third quarter of 1998, but the upward trend halted in the fourth quarter as orders tailed off. They edged up again in the first quarter of 1999.
The tender price index was at 318 in the fourth quarter of 1998, showing no movement from the third quarter. Tenders analysed in the first quarter of 1999 show a price rise of 1.6%, giving a provisional index of 323, near the top of Davis Langdon & Everest's forecast range.
Costs of preliminaries have edged up, and typically represent an 11-12% addition to the cost of works on traditional contracts. Brickwork and blockwork rates are up slightly, as good quality bricklayers are still in short supply.
New orders and output
Official figures for the fourth quarter of 1999 mirror the decline in confidence in the marketplace. Total construction output was almost flat for the second quarter running, although there was a 0.5% rise in new work.
New orders fell away markedly – 12% lower than in the third quarter of 1998 and nearly 15% lower than in the first quarter of 1998 at constant prices. At £6.22bn, new orders had the lowest quarterly return, in real terms, since the third quarter of 1996.
Overall in 1998, orders rose 3.1% on the previous year, although private housing and industrial work bucked the trend with falls of 10% and 12% respectively. In the fourth quarter, every sector showed a fall in orders compared with the previous three months.
Outlook
The most recent Construction Trends Survey, carried out by the Construction Confederation during the fourth quarter of 1998, continued to register increases in output and enquiries among surveyed firms. This prompted optimism about the first quarter and the year ahead, and most contractors still expect output to rise over the next 12 months, with only 17% forecasting a reduction. National contractors are the most optimistic. In the regions, contractors in the North-west and the Midlands are most bullish about 1999.
As a result of this increased optimism, contractors reported that they expected tender prices to increase in the first quarter, and DL&E's provisional analysis of tenders shows that this is happening.
The past three Construction Trends Surveys have revealed that contractors in London have been expecting a downturn in workload. If there is to be a tail-off in London, it is from a very high level of work, judging by the number of tower cranes on the City skyline at the moment.
The main non-contracting forecasting bodies continue to predict an increase in construction workload during 1999, and their predictions for total output in 1998 were accurate.
Forecasts for 1999 have been downgraded but mostly show positive growth. This time last year, the Building Material Producers forecast output growth of 3.5% for 1999. Its latest forecast has cut this to 0.5%. Similarly, in January 1998, Construction Forecasting and Research forecast a rise of 2.0% for 1999, now revised to a less dramatic 1.3%.
Cambridge Econometrics has taken a more pessimistic view, forecasting a 1.5% decline in construction this year, although it did predict an overly sharp drop at the end of last year.
Private housing output increased 1.6% in 1998, but was on a declining trend from the second quarter. Total new orders for the year were 10% lower than in 1997. CFR predicts a 6% fall in output for 1999. New orders in the fourth quarter of 1998 were at their lowest since 1995, but the trend seems about to change. Latest National House Building Council statistics for February show that the number of private sector applications for new homes was almost the same as in February 1998, virtually bringing to an end the trend of monthly year-on-year reductions.
Falling interest rates make housebuying ever more attractive (in spite of the demise of MIRAS), and housebuilders' confidence is rising. Halifax figures showing that house prices increased sharply in March have given a further boost to confidence. Housing has a fairly short lead time, so the amount of work around in 1999 may not be as low as predicted.
As well as increased capital spending on health, education, housing and transport until 2002, announced in the Comprehensive Spending Review last July, the chancellor's budget included an extra £430m for upgrading accident and emergency departments and improving doctors' surgeries over the next three years.
An extra £100m for science facilities is also to be provided by the Higher Education Funding Council. This will go to the Joint Infrastructure Fund, which was started last year with £300m from both the Department of Trade and Industry and the Wellcome Trust. It aims to strengthen the university science base, and is now attracting bids from universities.
Railtrack has announced substantial increases in its 10-year infrastructure programme, raising planned spending to £27bn. It is already one of the industry's biggest-spending clients. Other top clients include utilities such as West of Scotland Water, Severn Trent and United Utilities. Water and sewerage works spending is expected to continue to increase in 1999.
Taking all this into account, the outlook for construction does not look as bleak as it did six months ago. However, the industrial sector still seems set to have a much lower profile. Overall construction output is likely to rise in 1999 – albeit slightly – for the fourth consecutive year. Price pressures will come into play if output increases by much more than 1%. Materials prices are static, but much decline in the value of the pound or increase in commodity prices could affect them. Labour rates are not under pressure from supply constraints, but if housebuilding activity does bounce back, site rates for bricklayers could rise again by late summer.
The forecast for tender prices over the next 12 months is for a rise of 2.5-5.5%, depending on the level of activity. The year to the first quarter of 2001 is forecast to experience a similar rise. This is because increased building activity in the infrastructure, education and health sectors is expected to compensate for any reduction in pre-millennium spending and a possible easing of commercial office and retail work.
Building cost index
The building cost index rose 3.7% in the year to the first quarter of 1999, but eased back 0.5% in the past six months as materials prices softened. The building cost index is forecast to rise 5.4% over the next year.
Construction prices are under no pressure from materials. The Office for National Statistics shows that construction materials prices fell 0.7% over the year to February 1999, all of which occurred since last November.
Key construction materials such as timber are largely imported. Sawn softwood prices are 2.2% lower on a year ago, having fallen 12% the previous year. The prices of board products such as plywood have dropped 7.5-12.5% in the past year after a 10% fall the year before. Copper and aluminium fell 11% and 8% respectively over the past year.
Oil prices have swung sharply upwards. After bottoming out at below $10 a barrel (less than £6.48), oil prices seem to have stabilised at $15 (£9.72) a barrel. This will have an effect on all manufacturing and distribution costs, as will the increases in duty and road tax imposed in the budget. Some price rises in materials may result; a number of brick manufacturers raised list prices at the beginning of the year.
From 1 April, landfill tax for active waste rose from £7 to £10 a tonne. There was no increase in the rate for inactive waste, remaining at £2 a tonne. This means there should be no increase in the cost of disposal of ordinary soil off site, but the higher rate should encourage contractors to find the most economical process of disposal.
The Construction Industry Joint Council, which fixes wages for building and civil engineering operatives, agreed a three-year, three-part settlement in 1997. The third part comes into effect on 28 June, providing a 10% increase in craftsmen's basic pay and a 7.5% increase for labourers and intermediate skill rates. The union rate for craftsmen will then be £236 a week, or £6.05 an hour. In many parts of the country, this still falls well short of site rates. In London, a self-employed bricklayer can expect to earn more than £100 for a nine-hour day.
