The fall-off in workload predicted in the October tender price forecast has clearly been noted in contractors' and trade contractors' boardrooms. As a consequence, the upwards-only trend, in which building tender prices in London rose 12% between the third quarters of 1997 and 1998, has halted in the fourth quarter of 1998.
The tender price index for the third quarter of 1998 has firmed up at 318, showing no change from the provisional index published in October. The year-on-year increase on the fourth quarter of 1998 shows an increase of 11%.
The change of mood was clear in the Construction Confederation's November Construction Trends Survey, in which a majority of companies that responded expected lower tender prices in the fourth quarter. Such a pessimistic viewpoint was last expressed in 1991.
However, there is no real evidence of a headlong rush into recession. Government statistics indicate that workload remains generally strong. The DETR's December report on construction output showed a marginal 0.4% decline in the third quarter of 1998 compared with the previous quarter, and it was only 0.4% higher than in the same period in 1997. This stability has been sustained by new construction work (as opposed to repair and maintenance), which increased 2.6% in the third quarter of 1998, according to the same statistics, and 4.0% on the third quarter of 1997. In the first nine months of 1998, new work output was 3.8% higher than in the same period in 1997.
These statistics explain the tender price increases over that period. As confidence evaporated through 1998, doubts over the industry's ability to maintain such a workload arose. The cause can be traced back to the Far Eastern economic crisis that began 18 months ago and spread to Russia and South America, before causing concern in Western Europe.
Industrial
The most noticeable effects of world economic turbulence have been in the manufacturing industry, where the closure of a number of electronics plants in northern England and Wales has caused concern for those regions' economies. The closures can be attributed directly to the collapse of the Far Eastern economy and the slump in the price of semiconductors. No further inward investment in this sector can be expected in the near future.
Manufacturers have been fighting for their export markets since the pound rose sharply after the end of 1996. Although sales in the UK increased over the same period, these have not been enough to offset the strong currency. Nevertheless, construction work in this sector has held up better than commentators expected.
The latest DETR figures show that private industrial construction output in the first nine months of 1998 was 4.4% higher than in 1997. However, the expected decline has started to show up in the DETR's new orders statistics. In the first nine months of 1998, new orders were down £200m compared with the same period in 1997, a fall of 4.3%. Moreover, the provisional return for October showed the second-lowest monthly figure for the year (at constant prices).
As a consequence, this is the sector that has been most severely pruned by construction output forecasters. Construction Forecasting and Research predicts a 6% drop in output in this sector in 1999, followed by a further slump of 10% in 2000.
Commercial
The largest sector of the industry for the past four years has been private commercial. In 1997, this sector accounted for 28% of total new construction output, about 133% higher than industrial. And, unlike the industrial sector, the momentum in the commercial sector has been growing since 1994 and seems set to continue.
Comparisons are becoming increasingly problematic, as privately funded education and health projects are now classified for statistical purposes as private commercial, rather than public other new work.
Millennium and lottery funded projects should give a healthy workload in this sector for a couple of years, but, as retail growth figures slip, doubts about continuous expansion creep in. Delays are beginning to show in a few major office projects as potential occupiers embark on a round of mergers and retrenchment. Meanwhile, developers recall events of a decade ago and are erring on the side of caution.
Overall, the commercial sector has never seemed stronger. DETR output statistics have shown 10 continuous quarterly increases. The output value for the first nine months of 1998 was 10% higher than in the corresponding period of 1997, and the value for the third quarter of 1998 was exceeded in real terms only by the fourth quarter of 1990. For the reasons outlined above, a clearer picture is established by combining the private commercial and public other work sectors, but, even then, workload in 1998 was still exceeded only in 1990 and 1991.
Even so, most output forecasters have downgraded their predictions of commercial growth over the next two years, although they continue to foresee positive growth from the strong 1998 levels.
For new orders, the DETR's third-quarter figure was only just exceeded by the fourth quarter of 1988 and the first quarter of 1989, much of which will find its way into the output figures during the coming year.
Offices The commercial sector is still led by office work – 33% of the sector in 1997 – but this is no longer as dominant. Since 1992, the value of office work has risen 53%, shop work has gone up 65% and work in the entertainment field (cinemas, hotels, restaurants, sports centres and so on) has risen 116%.
Entertainment Clearly, lottery funding has had an impact on this area, but so has privately funded development, as shown by the dynamic growth in cinema construction and the increase in bars and restaurants in every major city.
Also, the sector seems fairly recession-proof. Bass, for instance, last month announced plans to increase its spending on its hotel and pub business from £185m to £400m.
Retail This sector is bemoaning continued decline in its sales growth, but the supermarket chains remain among construction's most valued clients. The long gestation period of supermarket planning and construction will ensure continuity of work. No major players have announced cuts in development. Wickes recently reported slower sales, in line with many other retail operations, but announced its intention to refurbish 37 stores during 1999 and 100 over the following three years.
Forecast
Construction workload may not increase as rapidly over the next two years as once anticipated, but positive growth is expected. The Building Material Producers now forecasts a rise of only 0.5% in 1999, but this will be followed by a rise of 1.5% in 2000. CFR has cut its figures less and predicts rises of 1.3% and 2.2 %. The average of these forecasts means an additional £500m this year and a further £1.1bn the following year.
There are still concerns about skills shortages and the availability of specialists. Despite the decline in housebuilding, 83% of contractors in the Construction Trends Survey reported difficulties in securing bricklayers (no change on the previous quarter). The availability of many other trades also deteriorated. Carpenters and joiners are expected to be in the shortest supply over the next year.
The Construction Confederation indicated that contractors are no longer as fully stretched, but 57% of companies nationally are still operating at more than 90% capacity. Conditions seem to have eased most markedly in London and the South.
Shortages of any kind inevitably lead to pressure on prices. M&E prices are under strain, and shopfitting and finishings work is expected to come under pressure as the year progresses and projects aim for completion by 2000. But there will be little or no price pressure from materials costs. Manufacturers have benefited from declining raw material costs over the past three years, and competition from cheap imported goods has also held prices in check.
DL&E's forecast for overall tender price increases in 1999 therefore remains largely unchanged. With a degree of uncertainty persisting, prices are expected to rise 2-5% in the year to the fourth quarter, with little variation nationally. During 2000, there will probably be inflation as projects that have slipped their completion dates are finished, increasing in tender prices about 2-5%.
Building cost index
Wages The building cost index rose 4.7% over the year to the fourth quarter of 1998, which is largely because of the three-year Construction Industry Joint Council wage award, the second part of which came into effect on 29 June. This increased basic wage rates 6-14%, depending on grade. The third part takes effect on 28 June 1999, increasing rates a further 7.5% to 10%, pushing craftsmen's basic rates from £178.62 a week in June 1997 to £235.95, a rise of 32%.
The 48-hour maximum working week provision of the European Union's Working Time Directive, which came into force on 1 October 1998, does not appear to have caused many problems. However, the paid annual leave requirement – three weeks off on average pay – resulted in increased costs for many employers over the Christmas shut-down.
The traditional holiday-with-pay scheme provides pay-outs only at the basic rate. Average pay in the industry, incorporating overtime, bonuses and productivity payments, is often much higher. To comply with the EU directive, employers had to provide top-up payments for the eight-day holiday over Christmas and new year. The Building and Civil Engineering Annual Holidays and Benefits Scheme is likely to be revised early in the new year to overcome this anomaly, with a resulting increase in costs.
Materials Cost increases have been restrained in this area. Office for National Statistics figures show that prices rose an average of 0.6% in the year to November 1998, with no increase at all over the past three months.
There remains little pressure on materials costs generally in the UK economy, as manufacturers have benefited from falling raw materials costs over the past three years. Over the past year, manufacturing input costs have fallen 8.5%, and 22% since the end of 1995. Oil prices, a key part of manufacturing and distribution costs, have fallen nearly 50% this year and, at $10 (£6.06) a barrel, are at their lowest for 25 years.
Forecast Materials prices should remain subdued in 1999, even if construction demand increases. Largely as a result of the known wage increase next summer, the building cost index is forecast to rise 5.6% in the year to the fourth quarter of 1999. The following year, a lower wage award should reduce the index rise to 5.1%.
