London Market Update - Q3
G&T’s London Market Update (Q3 2018) provides an overview of the London construction market in the third quarter of 2018. The report highlights changes to key macro-economic indicators over the reporting period, as well as significant construction-specific metrics such as the UK purchasing managers index, construction output, London commercial and residential new orders, key material costs, trade package inflation, and tender price trends and forecasts.
The report also shines a spotlight on various industry news and events that have happened in the last quarter. In this report we:
- Analyse G&T’s latest TPI survey data in order to gain an insight into market and supply chain conditions over the next six months in London
- Provide an update on Brexit, reviewing some of the current and potential implications of a ‘no deal’ scenario on UK construction
Some aspects of the full report are summarised below. For further information or details contained in the full report, please get in touch with your usual G&T contact in the first instance. Otherwise please contact Nick Rowe or Michael Urie
The UK Construction Purchasing Manager’s Index (PMI) came in at 52.1 at the end of Q3 2018, down 1.9% from the end of Q2 2018, but still indicating an expansion of construction activity.
July was a particularly strong month in the third quarter, recording a PMI of 55.8. Survey respondents commented on improving demand conditions and higher volumes of new project starts. However, the encouraging figure was likely boosted by a spill over of postponed work from Q1 2018.
London construction output grew in Q2 2018, with All Work rising 7.5% from the previous quarter. Private new housing (up 12.8%) and housing repair and maintenance (up 14.59%) were the largest contributors to output in Q2.
After the unusual spike in Q1 2018, London residential new orders fell sharply by 52% in Q2 2018. However, this is still above the 10-year quarterly average. Meanwhile, London commercial new orders continued their steady decline and fell a further 10.3% in Q2 2018 from the previous quarter. Brexit uncertainty is causing contractors and developers to put big commercial office projects temporarily on hold.
Falling new commercial orders in the past year will have a negative knock-on effect on construction output growth in 2019.
MATERIALS, KEY TRADE AND TENDER PRICE INFLATION
The Construction Material Price Index for ‘All Work’ was up by 5.6% in August 2018 compared to the same month in the previous year but has slowed in recent months.
Fabricated structural steel saw the largest year-on-year increase, rising 8.9% since August 2017. However, prices have stabilised since the end of Q2 2018. Ready-mixed concrete saw a notable drop off in price between July and August, falling 4%.
Key Material Costs (Re-indexed) (Source: ONS)
A weak pound against the Euro drove cost inflation of imported materials in the period, as did higher oil and steel prices.
Providing we see an orderly Brexit with a retention of open market trading conditions, G&T forecast 2018 tender price inflation for London at 1%. We have revised up our 2019 forecast for London from 0.5% to 1% due to continued pressure from higher material and labour costs. Our inflationary forecasts for 2020, 2021 and 2022 remain unchanged at 1%, 1.5% and 2% respectively.
IMPACTS OF BREXIT
With the date of the UK's departure from the EU looming ever nearer, we look in greater detail at some of the areas that are likely to be affected:
- Contract Provisions
- Skills and Labour
- Supply and Demand