UK market intelligence - summer 2017 edition
One year on from the referendum in which Britain voted to leave the European Union, it is becoming increasingly clear that the vote has served more to amplify existing trends in construction rather than establishing new ones.
Contrary to some pessimistic predictions made in the wake of the referendum vote, the UK’s economy hasn’t plummeted to crisis point but the shape of a post-Brexit economy remains unclear as the negotiations with Brussels continue.
The Chancellor of the Exchequer, Philip Hammond MP, has outlined plans to seek a two-year transitional deal which retains free movement of people, access to the single market and an ability to strike trade deals with other countries.
However there are signs that Britain’s economy is in transition mode. While GDP continues to grow, it is now sluggish in comparison to the quarterly growth rate for the same period in 2016. This cooling off of growth is also evidenced within construction. Recent survey results indicate the weakest pace of sector growth since August 2016.
Business confidence wanes as order book lighten
Contractors have reported a slowdown in the progression of order book completions on both the quarter and the calendar year. In turn, this is impacting pricing practices, with tender prices increasing at a slower rate than previously anticipated.
Gradual movement towards tighter margins reported
Faced with increasing levels of competition, contractors are reporting a gradual movement towards tighter margins. This would suggest that contractors are increasingly absorbing costs in an attempt to maintain market share, an approach that comes with a health warning. Acting as a reminder of these risks, industry insolvencies are beginning to creep up – the latest data from the Insolvency Service reporting the highest level of insolvencies since Q1 2014.
UK skills crisis affecting projects
Alongside this softening pipeline of order book completions, contractors continue to report easing of capacity constraints and an increased capacity to take on new projects. Despite increased capacity there is still an issue with specialist skills and labour. This very well could be exacerbated by the prospect of a reduced European workforce post Brexit. While a transitional deal retaining freedom of movement with Europe will be welcomed by the sector, huge questions remain around the extent of migration controls post 2022.
Cost inflation easing as UK adjusts to lower sterling value
While inflationary pressures have started to ease slightly for construction inputs, costs are still increasing. The anticipated increase to the cost of steel products continues to look relatively high in comparison to other building materials and components. This can partly be attributed to increasing energy costs and a moderate rebound in minerals associated with steel production such as iron ore and coal.
For the full analysis, insight and advice on how to mitigate the risks, download the full report here.