Executive Summary
MACRO ECONOMIC CONDITIONS
Key data
GDP forecasts for 2024:
+0.80%
(OBR)
+0.40%
(OECD)
+0.50%
(IMF)
CPI forecasts for 2024:
+2.20%
(OBR)
+2.75%
(OECD)
+2.21%
(IMF)
Unemployment forecasts for 2024:
4.40%
(OBR)
4.70%
(OECD)
4.15%
(IMF)
Hopes for economy rest on interest rate cuts and post-election reset
The flatlining of GDP growth reported in the last quarter has continued, and the OBR, IMF and OECD are all forecasting low growth levels for the years ahead. Although CPI is falling, down to 3.2% in the year to March, and unemployment has been low until the recent uptick to 4.2%, living standards in the UK have fallen significantly in recent years, and demand in the economy is now being impacted.
Newly published government borrowing figures show annual borrowing of 5-6% above government forecasts, which together with National Insurance cuts in March and ongoing high interest rates, could constrain tax cuts later in the year.
Given the Bank of England’s target rate of 2% for inflation, there are obvious conflicting pressures to be faced. Any new government, whatever its political shade, is going to have little room for manoeuvre. Interest rates need to fall, to revive borrowing and investing, and spending plans need to be implemented to revive a somnolescent economy.
Once an election is out the way and if signalled interest rate cuts can be achieved, with great hopes for the green economy, decarbonisation, advanced manufacturing and life sciences sectors, the private sector may start to warm up.
CONSTRUCTION PIPELINE PROSPECTS
Key data
New construction work done volume:
-2.07%
full year 2023 (ONS)
Repairs and maintenance work done volume:
+8.33%
full year 2023 (ONS)
Work done volume:
+1.94%
full year 2023 (ONS)
New orders volume:
-16.02%
full year 2023 (ONS)
Falling orders for new construction work raise insolvency concerns
The workload pipeline of contractors and subcontractors remains strained due to fewer new orders. Projects on the way to completion need to be replaced, but in overall terms that appears not to be happening at sufficient levels.
Consequently, the tightening of margins is continuing, increasing insolvency concerns. At a local level, tendering conditions vary and are dictated by where major projects sit in the build cycle. There are signs that clients are aware of the difficult trading conditions facing contractors and are now willing to work more collaboratively with them.
Overall, new orders for construction work fell by over 16% in 2023, according to the latest ONS statistics. The most notable fall lay in the private industrial segment, being down over 21%, with warehouses down more than 36%. However, private housing being down almost 29% has released significant resources to the market, given it accounts for 30% of the whole market’s activity.
INPUT COSTS
Key data
Input costs forecast for 2024:
+4.00%
full year 2024 (BCIS)
Input costs forecast for 2025:
+2.90%
full year 2025 (BCIS)
Supply chains remain resilient and input costs have stabilised
As yet, there are no signs of a revival of the price spiking of input costs effected by the Ukraine war, despite its ongoing impact on the geopolitical sphere. Supply chains have clearly developed ways in which to deal with the uncertainty, and that is presumably why the Red Sea issue has hardly moved the needle.
Steel and timber prices are the notable movers downward, but for the rest of the materials universe, input costs have stabilised and it is business-as-usual, although contractors and subcontractors are increasingly having to make bidding decisions based on tightening circumstances of economic necessity.
TENDER PRICE FORECAST
Key data
RLB Weighted Average TPI 2024:
+3.38%
full year 2024 (RLB)
BCIS Tender Price Index 2024:
+1.50%
full year 2024 (BCIS)
Little change in forecasts indicate both stability and caution in the marketplace
With the need for workload making bidding increasingly competitive, insolvencies in the supply chain continue to be an issue of concern. Clients’ awareness of the extent of trimming of margins is a factor in understanding the extent of risk being taken on by bidding contractors and subcontractors.
RLB’s forecasts are barely changed since the last quarter, reflecting stability in the marketplace. It also indicates an element of caution among bidders facing unknown political and economic outcomes, despite the imperative to replenish workloads.
The proximity of uplifts projected by the Building Cost Information Service (BCIS) in its General Building Cost Index and its All-in Tender Price Index, standing at similar levels to RLB figures, shows a tight marketplace in which workload continuation is pressing, but margins are slender.
Looking ahead to 2025, tender price forecasts gravitate towards outstripping input cost uplifts, but not drastically, the outlook remaining challenging for estimators given turnover imperatives.
RLB Tender Price Index uplifts published in CMI Q2 2024 vs published in CMI Q1 2024
The chart above shows an average of RLB's regional tender price forecasts for the respective years, weighted by regional new orders volumes of workload for the year to 2023 (ONS).
KEY REFLECTIONS
Good news on the economy badly needed
The macro-economy remains in a parlous position, with competing adverse economic circumstances. The temptation for government to spend its way out of the stasis is strong, but unfunded spending has consequences. Regardless, the government urgently needs some economic good news as we approach the next general election.
Commodity costs falling, material costs rising
The softening of commodity input costs has helped the construction industry, but a business-as-usual sentiment has now taken over in the market for input materials. As such, the cost trend is upwards, despite pressure on all shades of contractors to obtain extra replacement work.
Supply and demand in market out of sync
The most pressing aspect of the current market can be said to be continuity. Mention is made at regional level of local sector expansions and compressions, but nationally the overall picture is of a need for new work. Major projects rolling to completion have released resources, but that does not translate to falling input costs, as labour resources have still to cope with the rising cost of living.
