UK market intelligence winter 2019/20: from constraint to crunch?

Kristoffer Hudson

Economist

2019 saw the UK economy swing from periods of modest growth to near stagnation. By the final months of the year, the position was one of promise rather than progress.

Construction industry output was positive in Q4, increasing 0.6 percent. However, this pace of growth is less impressive when Q2’s sharp contraction of 0.9 percent is taken into account.

New orders in Q4 also rose by 4.4 percent on Q3, but 2019’s pattern of halting progress – one step forward, two steps back – has taken its toll on sentiment. Our latest contractor survey found that in Q3, confidence fell to its lowest level on record.

More than 60 percent of contractors surveyed reported lukewarm market conditions, the highest level ever tracked by our survey and double the proportion recorded in the months prior to the 2016 EU referendum. Meanwhile the number of contractors experiencing warm market conditions in Q3 2019 fell sharply.

The root cause of this shift in market temperature was weak client demand, which triggered stiff competition among suppliers and held tender price inflation to a modest 2.1 percent in 2019.

On the face of it, such challenging conditions might suggest that contractors would jump at the government’s pledge to invest £100bn in infrastructure over the next five years. However there is a major question mark over the construction industry’s ability to cope with such a potential increase in demand.

From constraint to crunch

While a rapid uptick in demand is not a foregone conclusion, the impact on the supply chain is likely to be considerable, even if it is felt in stages. One obvious and immediate symptom of a boost to demand is likely to be an increase in tender prices.

A rise in tender price inflation may be fired by a mixture of emotion and employment. Many contractors have spent several years cutting their margins to the bone, so the prospect of a slew of new tenders may embolden them to raise prices.

Contractors emerging from lean times can be expected to embrace the idea of more abundant work. But their ability to deliver to the required standard, and on budget, may be compromised if they are already close to full capacity.

Our survey data shows that in Q3 contractors were operating at an average of 86.0 percent capacity, and the figure is creeping back up.

Speed bump or brick wall?

The greatest danger is that the capacity crunch becomes more than just a speed bump that impedes the industry’s ability to accelerate back up to a more robust level of output. If left unchecked, it could trip up contractors just as they try to stride ahead – and even jeopardise the entire Construction Sector Deal.

Mitigating the capacity crunch now will also serve to keep the Deal on track in the future.

Download the report to see more economic data and insight, and to read about tender conditions in the UK and Europe. 

For further information contact:

Kristoffer Hudson
Economist

t: +44 (0)113 258 4400
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