28 February 2018

Tough year ahead for the construction industry according to trade body CPA

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2018 is likely to be tough for the construction industry, according to two influential surveys by the CPA, with new investment hampered by the slow progress on Brexit, particularly in the offices sub-sector, and construction supply chain pressures driven by rising fuel and energy costs. 


Construction Industry Forecasts


Construction output is likely to remain flat this year, according to the Construction Products Association's latest forecast.


The effects of Carillion’s liquidation and a fall in public housing repair work are expected to hit the industry this year, despite urgent work needed following the Grenfell disaster.


Uncertainty created by the slow progress of the UK government’s negotiations on the terms of leaving the EU has hindered major new investment in private sector construction, especially for new, high-end residential and commercial offices in London, which are reliant on foreign investment.


Infrastructure continues to be the key driver of growth, but this relies on the Government delivering promised infrastructure projects. These would result in a 6.3% rise in infrastructure work in 2018.


According to the CPA, the sharpest decline for construction in 2018 will be in the commercial sector, and particularly felt in the offices sub-sector as a lack of clarity on the UK’s post-Brexit deal has led to a sharp fall in contract awards.


Office construction is expected to decline 15% in 2018 and 10% in 2019, with further concern that this will accelerate if firms choose to move operations out of the UK and into other EU member states.


Economics Director at the Construction Products Association, Noble Francis, said: "Recent construction output and Markit/CIPS data have already highlighted subdued activity in the construction industry and our latest forecasts suggest that 2018 is likely to be tough for the industry.


"Overall, we are forecasting construction output to remain broadly flat this year, but this is before the full impacts of the liquidation of Carillion in January feed through the supply chain and government will need to take a key role in mitigating the effects as it has already done on the services part of Carillion.


"Infrastructure activity is still expected to grow by 6.3% this year if politicians are able to deliver on their many announcements of major projects and spending across roads, rail and energy. Government will also need to help councils with funding to address issues on social housing towers above 18 metres since the Grenfell tragedy. Output in public housing repair, maintenance and improvement has already fallen each month since the tragedy and, without assistance, will fall 2% this year."


The Construction Products Association represents the UK’s manufacturers and distributors of construction products and materials. It says the sector is worth more than £55 billion in annual turnover.




Construction Trade Survey


The latest Construction Trade Survey, for the fourth quarter of 2017, reports that while activity continued to increase for main contractors, SME builders, product manufacturers and specialist contractors during the quarter, the construction supply chain faces a struggle with rising costs for raw materials, labour and energy.


Increases in both fuel and energy costs were reported by 93% of heavy side product manufacturers in the fourth quarter of 2017. This was said to be due to a rise in global oil prices at the end of the year, as well as a lagged effect of Sterling depreciation in 2016, as hedging contracts expired.


However, 13% of heavy side manufacturers and half those on the light side reported an increase in sales compared to a year earlier.


Higher material costs were reported by 82% of main contractors, while 73% reported an increase in costs. At the same time, tender prices were reported to have increased by only 18% of main contractors, leading to a fourth quarterly decline in profit margins.


Analysis showed that the top ten largest contractors had a pre-tax profit margin of -0.5% in 2017. However, a rise in activity was reported by 22% of main contractors and 33% of specialist contractors.


For civil engineering firms, the fourth quarter of 2017 saw the first falls in activity and new orders in four years. A decrease in new orders was reported by 10% of civil engineers – raising concerns about the pace of delivery of infrastructure projects, some of which may yet face delays as Carillion contracts are re-assigned and re-tendered – and 4% of civil engineers said their workloads had dropped.


Meanwhile, costs rose for 82% of civil engineering firms in the fourth quarter of 2017, and yet only 36% of them increased their tender prices.


Looking ahead, manufacturers’ expectations for the next 12 months weakened against a backdrop of ongoing economic and political uncertainty. 43% of firms on the heavy side and 30% on the light side anticipated a fall in sales.


It is expected that a clearer picture of what effect Carillion’s liquidation has had on contractors’ activity and expectations will be provided in the CPA’s survey for the first quarter of 2018, since the survey for the fourth quarter of 2017 covers activity prior to the announcement of Carillion’s liquidation at the start of this year. However, the survey revealed that the company’s liquidation has shone a brighter light on contractors’ narrow margins.


Rebecca Larkin, Senior Economist at the CPA, said: “The Q4 survey marked the fourth consecutive quarter of falling profit margins among building contractors. This combined with Carillion’s liquidation at the start of this year only emphasises the financial strains exerted by a protracted period of rising costs passing through the supply chain. Falls in new orders reported in the four sizeable sectors of commercial, infrastructure, industrial and public non-housing add another downside to the outlook for 2018 given the early signs of slowing activity at the end of last year.”