UK construction: confidence increasing, new orders also begin to rise

Citation

(2000), "UK construction: confidence increasing, new orders also begin to rise", Facilities, Vol. 18 No. 3/4. https://doi.org/10.1108/f.2000.06918cab.028

UK construction: confidence increasing, new orders also begin to rise

UK construction: confidence increasing, new orders also begin to rise

Keywords: Economic growth, Construction industry

Prospects for the construction industry continue to improve according to the most recent new orders data as well as the second quarter RICS construction market survey. So far, official data point to a gradual recovery in output, though survey evidence is becoming increasingly more bullish, particularly relating to activity a year from now. This inevitably raises questions over the industry's capacity to cope with increased activity without generating rising costs and price pressures. Low inflation in the economy will restrict rises in tender prices this year. However, increasing skill shortages signal that upward labour cost pressures could arise as construction activity picks up into 2000.

Construction orders for May showed a slight increase. They have been trending higher since the beginning of the year, after a sudden drop in the fourth quarter of 1998. The rebound seems relatively strong, with an underlying increase of over 14 per cent from lows in February, though total orders are still some 10 per cent below their 98Q3 peak. Furthermore, the RICS construction market workloads data for Q2 showed the biggest quarterly increase since the end of 1995. The survey shows an upturn in activity being driven by much stronger private housing and commercial construction, but is mainly evident in the South of England.

Helping to boost orders in recent months has been increased activity in the private housing sector, responding to rising demand and prices since the start of the year. On the other hand, orders originating from the public sector have shown little sign of increasing, though there are some tentative indications from construction output figures that public housing repair and maintenance work is beginning to edge higher. Evidence from the RICS construction survey of workloads confirms that private housing activity rose sharply in the second quarter of the year.

The RICS construction survey also indicates that commercial work has continued to support overall workloads and is increasing at its fastest pace since early 1997. Moreover, surveyors working in the commercial field have experienced rising activity over the past year in the office and industrial sectors, though retail development has been more subdued. Overall, commercial construction orders (non-industrial) show a slightly less positive picture to May, at best pointing to a mild upturn in work. While the monthly data can be very erratic, orders in the retail and entertainment sector have strengthened in recent months, while PFI-related activity is providing a boost to education and health work. However, this has been offset by notable weakness in office orders, which were down in May an underlying 10 per cent from their high in February.

Reports of rising manufacturing activity have increased over the last few months, mainly emanating from business survey data, though actual output has also edged upwards in recent months. Nevertheless, industrial construction orders continued to head firmly lower in May on an underlying basis, and are down by 25 per cent since last September. Bearing the brunt of the fall has been the warehouse sector, possibly reflecting the adverse impact of rising transport costs. However, the RICS construction workloads data provide an early indication that the resilience of manufacturing output is leading to a modest revival in building activity.

Surveyors are optimistic that overall construction workloads will continue to improve during the next 12 months. Moreover, firms are also more optimistic that they will be able to raise profit-margins over the near and medium term. However, the BCIS expect tender price inflation to slow this year as the construction industry adjusts to weaker price pressures in the economy. Tighter cost control is the only avenue available to raise profit margins. Labour market statistics show earning growth in the industry falling to an annual 4.6 per cent in May from over 7 per cent at the end of last year, while material costs in the industrial sector are flat. However, the RICS survey data for Q2 show skill shortages increasing and will place some upward pressure on labour costs going into 2000.

For further information contact: Milan Khatri, Senior Economist; Corin Thoday, Economist; Virginie Fannius, Economist. Fax: +44 (0) 171 334 3894; E-mail: economics@rics.org.uk