Q2 2019

Macro Economics

UK economic growth for Q2 2019 is likely to be weaker than Q1 growth. The rolling three-month growth slowed to 0.3% in May 2019 from 0.4% in the three months to April. Consequently many economists expect growth to be close to zero in Q2.

Although the UK saw positive GDP growth in the first quarter of 2019, this was arguably underpinned by stockpiling efforts rather than an upturn in spending. GDP subsequently contracted by -0.4% in April 2019 compared to the previous month, but then rose by 0.3% in May. This means that June’s growth figure will have to be strong in order to avoid a contraction in Q2 2019.

Both services and manufacturing contributed positively to the rolling three-month growth in May 2019, but construction growth was flat and made no contribution to headline GDP growth. However, in the month of May construction grew by 0.6%, reversing the negative growth trend from two previous months and making a positive contribution to monthly GDP growth.

Manufacturing production expanded 1.4% in May compared with the previous month, up from a contraction of 4.2% in April. The boost from Brexit stockpiling clearly evaporated in April with the data suggesting that manufacturers are either adequately stocked or intend to run down their surplus supplies. High stock levels, ongoing Brexit uncertainty and softer global economic growth will likely act as a drag on manufacturing output growth for the near future.

The latest PMI readings show that the services sector expanded only marginally in June. Both manufacturing and construction sectors have experienced two consecutive months of contraction, with the latest PMI reading for construction dropping to its lowest since April 2009. The survey results revealed that all three construction sectors – housebuilding, commercial and civil engineering - reported sharp falls in activity in June 2019.

The Consumer Price Index (CPI) 12-month inflation rate was 2% in May 2019, marginally lower than April’s growth rate figure of 2.1% and sitting on the Bank of England’s (BoE) 2% target. CPI is forecast to fall below the 2% target in the coming months in response to lower oil prices and an impending reduction in electricity and natural gas prices.

Whilst growing faster than expected, UK Wage growth showed signs of fraying since February, with average weekly earnings growth (total pay) dipping to 3.1% (year-on-year three month average to April) compared to 3.3% in March. The BoE recently said it expected wage growth of 3% at the end of 2019. The unemployment rate fell to 3.8% - it’s joint-lowest since the three months to January 1975, so overall, the labour market remains strong.

UK interest rates remain at 0.75% and although the BoE has repeatedly said that it expects to introduce “limited and gradual” interest rate increases if there is a smooth Brexit, many in the financial markets believe that the central bank will not tighten monetary policy.


The total value of all construction work delivered in Great Britain in May 2019 was £13.78bn – up 0.6% from April 2019 and 1.7% higher than the same month one year ago. Comparing the last three month period to the same three month period a year earlier, there was a 2.9% increase in ‘All Work’ output.

Comparing the latest three-month on three-month output growth figures, ‘All New Work’ grew marginally by 0.28%, whereas ‘All Repair and Maintenance’ fell by -0.5%.

The ONS’ seasonally adjusted output figures show that new private industrial work (up 10.3%) and public housing repair and maintenance (up 3.8%) were the strongest performing sectors in May 2019 compared to the previous month. Growth in new private industrial work output is likely to be driven by the need for new distribution and logistics facilities, especially if Brexit makes the just-in-time delivery model harder to sustain. Private commercial, one of the worst performing sectors over the last year, continues its downward descent – with output falling by a further -3.2% in May 2019 compared to the previous month.

Falls in private residential output growth in both December 2018 and March 2019 led some commentators to believe that the strong growth in recent years was coming to an end. Whilst output in the sector grew in both April and May, the latest PMI survey showed a reduction in housing activity and demand due to growing ‘risk aversion’. The PMI survey results are further supported by Q1 2019 ONS new order data, which showed private residential new orders fall by -7% compared to the previous quarter. The sector is the largest contributor to total all new work output and weakness in the segment could heavily impact overall output growth this year.

Infrastructure continues to be a very strong sector, with output growing consecutively for the last five quarters. Forthcoming large infrastructure projects and delays to some existing projects are a cause for optimism in the sector. To a certain extent we anticipate that infrastructure output growth in the coming years will help make up for ongoing weakness in the private commercial sector and any cooling in the private residential sector.

Political uncertainty is likely to keep output growth subdued for the remainder of 2019 as some projects continue to be delayed in this low-confidence climate.


1907 Uk Regions Map


New order data from the ONS for the first quarter of 2019 was fairly positive. New orders rose 9.6% to £11.98bn in Q1 2019 compared to the previous quarter – the highest quarterly growth rate since Q3 2017.

UK new orders in the Q1 2019 were on par with new orders in the three years leading up to the EU referendum vote, indicating that there is still appetite for UK construction projects. In the twelve quarters since the EU referendum vote, eight of those quarters have seen quarterly period-on-period contractions in growth. Whilst there has certainly been a downward trend in new order growth since June 2016 for ‘All Work’, it has been a very gradual one. If we extend the time horizon, the 10-year quarterly new order average is £11.77bn – 2% lower than the Q1 2019 new order figure.

On a sector basis, public new housing and other public new work fared the best in Q1 2019, with new orders for each growing 29% and 28% respectively compared to the previous quarter. The only sector that saw negative quarter-on-quarter growth was private new housing (-7%). A slowdown in the sector, which accounts for approximately 25% of all new work, will scupper the Government’s target of building 300,000 houses a year.

The general drop in confidence, as demonstrated by June’s poor construction PMI reading, may feed into official new order data over the next few quarters, so we continue to anticipate subdued new order growth in the short term. G&T’s recent experience is that some projects that were previously put on hold are now coming back to life. Clients are being more selective with tenders and there are fewer large private sector projects coming through. The consensus is that most new order growth over the course of the next year or so is likely to come from an uptick in public sector work.


Little progress has been made on Brexit since our last TPI report. The political landscape is in a state of constant flux and this uncertainty is evidently denting investor confidence. Whilst the UK retains its position as the top destination in Europe for foreign direct investment (FDI), investment is down significantly on pre-referendum levels. Uncertainty over the future trading arrangements with the EU has discouraged many from committing capital into UK construction projects.

Although a number of pipeline projects are not being converted into turnover, G&T have seen growth in some key markets such as mixed-use and commercial office. Some developers are taking advantage of the increasingly competitive tendering market and have moved forward on projects previously placed on hold.

Whilst enquiries are still being received, the market has been noticeably quieter in certain sectors. There have been a reduced amount of larger projects to bid for in the last six months. Our internal survey results show that whilst some contractors are starting to chase work, others are quite busy. The net result is that on average contractor workload is not forecast to significantly change over the course of the next six months.

Feedback from the supply chain has been mixed. Generally we are seeing more appetite from tier 1 and tier 2 contractors to fill order books from 2020 onwards, so we may see more competitive tendering in a bid to secure workload. However, tendering is likely to be selective as many contractors remain risk-averse and wary of what will happen after the 31st of October 2019. As we explore below, input costs show few signs of abating and in the current competitive market, but due to tighter market conditions firms will be unable to fully pass these on which will put further pressure on contractor profit and margins.