A monthly decrease in construction work belies longer-term growth, with the number and value of contracts substantially higher than a year ago. Michael Dall discusses the highlights of Barbour ABI’s monthly Economic & Construction Market Review
The last spring Budget was announced in March with the UK set to have only one statement per year in the autumn. Many headlines focused on the change in National Insurance contributions for the self-employed with an increase in the rate payable which was subsequently scrapped. In addition there was a decrease in the tax-free allowance for dividend profits. But it was the revision of the Office for Budget Responsibility’s (OBR) economic forecasts that attracted most headlines with the planned increase to the infrastructure budget the most relevant policy announcement for construction.
The OBR’s updated economic forecasts show GDP growth is now estimated to be 2% in 2017, an increase from the 1.4% forecast in the Autumn Statement. However, the forecast for 2018 received a downward revision to 1.6%, down from 1.7% in December. The figure for 2019 was also downgraded to 2.1%, from 1.7% at the Autumn Statement. Growth is expected to recover to 2% in 2021, although that is still below long-term average growth of around 2.5%. It is clear that 2018 and 2019 are when the OBR expects the majority of short-term economic “shocks” from the Brexit vote.
The fall in the value of Sterling since the Brexit vote led to inflation forecasts to be revised for 2017 from 2.3% to 2.4% as the weaker currency leads to more expensive imported goods. The OBR’s inflation target of 2% is predicted to be met in 2019, whereas it was predicted to be 2021 in the Autumn Statement. Unemployment forecasts were improved in the Budget, reflecting the view that the UK labour market remains robust. Unemployment is now forecast to be lower in 2017 at 4.9% compared with 5.2% in the Autumn Statement. It is then forecast to be 5.1% in 2018, with the forecast 5.5% in at the Autumn Statement. Taken together these forecasts imply that the economy is set for some turbulent years with higher inflation and lower growth but that the majority of this will have occurred by 2020.
The fiscal impact of these changes to the economic outlook was marked. While in December it was estimated that the government would have to borrow £46.5bn, it is now estimated to have a borrowing requirement of £58.3bn in this fiscal year. The figure for next year also increased from £21.9bn to £40.8bn.
Policy measures for construction announced in the statement included:
The value and number of construction contracts in March 2017 were significantly higher than March 2016. The latest figures from the Office for National Statistics (ONS) show construction shrank by 1.7% between January and February 2017. Comparing output levels with February last year showed an increase of 0.5% (see Construction activity by sector). New work in every individual sector experienced monthly falls, with infrastructure showing the biggest drop of 7.3%. At the same time repair and maintenance work showed month-on-month increase of 1.2%. Comparing output in February 2017 to the previous February shows that the industry grew by 0.5% with new public and private housing growing as well as private commercial and other public work. However, infrastructure declined by 7% following a strong showing in February 2016 but new public housing increased by 6.6% after being a poor performer in recent times.
The value and number of construction contracts in March 2017 were significantly higher than March 2016
The CPA/Barbour ABI Index, which measures the level of contracts awarded using January 2010 as its base month, recorded a reading of 140 for March (see Contracts awarded graph). This is a slight decrease from the previous month but continues to support the view that overall activity in the industry remains strong. The readings for private housing remain high at 245. Commercial offices activity also increased in March after a number of fallow months, with a reading of 118.
According to Barbour ABI data on all contract activity, March witnessed an increase in construction activity levels with the value of new contracts awarded £6bn, based on a three-month rolling average. This is a 1.1% increase from February and a 7.1% increase on the value recorded in March 2016. The number of projects within the UK in March increased by 14% on February, and were 8.1% higher than March 2016.
The majority of the contracts awarded in March by value were in the East Midlands which accounted for 20% of the UK total (see Locations of contracts awarded). The largest project in the region awarded in March was the East Midlands Gateway, a rail freight interchange valued at £558m. In addition, the contract to construct a 300MW gas turbine in Spalding, Lincolnshire, was a large contributor to the region’s share. This contract was valued at £450m and was awarded to Siemens. The South-east had the second highest portion of contract activity by value in March accounting for 15% of the value awarded. The highest value contract awarded in March was the residential development in Lily’s Walk High Wycombe valued at £75m.
Residential had the highest proportion of contracts awarded by value in March, with 32% of the total value of projects awarded. Large projects include the Lampton Road development in Hounslow, set to deliver 762 houses at a value of £76.5m, and the Lily’s Walk development in Wycombe, valued at £75m. There was also a high-value contract awarded for a residential care development called Mount Leven Retirement Village in Yarm, Cleveland. This is set to deliver 332 retirement dwellings at a construction value of £50m.
After the residential sector the next largest in March was infrastructure which accounted 30% of contract value.
The value of contracts awarded in the infrastructure sector increased slightly in March, with the total value awarded £1.5bn based on a three-month rolling average. This is a 1% increase from the previous month but 16.6% lower than March 2016.
In the three months to March the total value of contract awards was £4.2bn based on a three-month rolling average. This is 2.3% higher than the previous three months but 0.9% lower than the same period in 2016. This indicates a more subdued performance in the sector over the long term but the monthly increase provides hope of better prospects for 2017 as government rhetoric on prioritising infrastructure continues.
The East Midlands dominated infrastructure contracts in March, accounting for 58.8% of the value awarded, a large increase on its share of 3.2% in March 2016. The contract for the East Midlands Gateway rail freight interchange was the highest value contract awarded in the region in March 2017. This intermodal freight terminal is valued at £558m and will include warehousing, new rail and road access with associated infrastructure. Another high value contract was also awarded in the region in March, the Spalding Energy Expansion Gas Turbine in Lincolnshire. This is designed to produce 300MW of energy and has an estimated value of £450m.
Scotland attracted the second highest share of contract value in March 2017, albeit significantly lower than the East Midlands, with 12.8% of contracts up from 11.3% in March 2016.