UK construction output grew by 3.3% in the year to February 2019 according to the ONS. Weak output growth towards the end of Q4 2018 had led some to anticipate flat or even negative growth in 2019. However, robust growth in both private housing and infrastructure output helped make up for a poorly performing commercial sector, with total output in the three months to February 2019 up by 3.9%.
Strong growth in industrial and infrastructure sectors offset declines in commercial, but the outlook is still a mixed-bag. IHS Markit/CIPS data for February and March 2019 showed a decline in total construction activity, with the first back-to-back fall in monthly output levels since August 2016. Whilst IHS Markit noted that new orders did grow slightly in March, they were still well below their long-term average.
Sectors dependent on high up-front investment for a long-term rate of return, such as commercial buildings, continue to be the most affected by Brexit uncertainty.
MPs recently ruling out a no-deal Brexit has not reduced the purchase of materials as part of firms' stock-building efforts as a hedge against Brexit. Contractors have reported increased delays in getting building supplies due to low stocks and stretched vendor and transport capacity.
Whilst our latest tender pricing forecasts are not quite a replica of our previous TPI report, little has changed in outlook as the UK remains in a Brexit-induced holding pattern. With such a politically uncertain environment, long-term forecasting is particularly tricky, but as we explore in this report, in the shorter term there are several key factors at play that could influence UK tender prices.
Our UK average tender price inflationary forecast is 1% for 2019, 2020 and 2021. We then forecast tender price growth to pick up in 2022, rising to 1.5%.
Our 2021 UK average forecast dropped 0.5% compared to our previous set of forecasts, due largely to the results of a few key regional markets such as London and the South East that have caused a drag on the weighted UK average.
For 2019, our forecasts for the South East, Wales and North East have been marginally revised up, whilst our forecast in the North West has been revised down. Although output in the North West remains on an upward trajectory for the time being, new orders are showing signs of slowing. Consequently we forecast a slower rate of tender price inflation as project programmes are pushed out.
All forecasts take account of all sectors and project sizes as a statistical average, indicating an overall trend in pricing levels. It should be remembered that individual projects may experience tender pricing above or below the average rate, reflecting the project specific components and conditions. All forecasts continue to assume an orderly Brexit with open market trading conditions being retained.