Macro Economics

UK economic growth picked up in the second quarter of 2018, with GDP seeing quarter on quarter growth of 0.4% (Q1 2018 Q-on-Q growth was 0.1%). The annual rate of GDP growth has been revised down slightly from 1.3% to 1.2%, with UK growth over the first six months of 2018 coming in at its weakest level since 2011. However, there are encouraging signs that activity strengthened at the start of Q3 2018.

The Consumer Price Index measure of inflation was 2.4% in September, down from 2.7% in August 2018. The fall means the squeeze on wages is easing as UK wage growth hit 3.1% up from 2.6%, the highest monthly rise in a decade.

The Bank of England raised interest rates from 0.5% to 0.75% amid concern that the current low unemployment rate risked re-igniting wage pressure. The Bank’s monetary policy committee judged that the dip in output in Q1 2018 was temporary, with the economy bouncing back from the effects of the “beast from the east” earlier on in the year.

Construction Growth: From Stagnation to Contraction

After five years of growth, the Construction Products Association (CPA) is forecasting a moderate fall in construction growth in 2018, anticipating growth for the whole of the year to fall by 0.6%. The CPA has revised its forecast down from stagnation to contraction, with Brexit uncertainty helping fuel the decline in growth, drying up international investment and reducing demand in prime residential, commercial offices and industrial factories.

The CPA believes that there was an element of playing catch-up in Q2 2018 after the demise of Carillion and the bad weather in Q1 2018. UK construction lost £1bn of work because of these two events, but it is estimated that the majority of the work will be recovered over time.

Private housing output, which has been revised up from 2% to 5% in 2018 by the CPA, and infrastructure remain the main drivers of growth for the construction industry as a whole. Without these two sub-sectors construction output would fall by 3% in 2018.

At the other end of the scale, commercial is expected to see sharp declines in 2018 and 2019, with the offices sub-sector forecast to fall 20% this year and a further 10% in 2019. The CPA also forecast retail to be another poor performer.

Regional Breakdown of Construction Output

The UK construction PMI reached a 14-month high in July (55.8) but subsequently fell in August and September. Civil engineering was the worst performing sub-category of construction work, with activity in decline, but housebuilding and commercial construction continued to increase at a solid pace.

So while the rate of construction output has slowed since July, new order books are strengthening which is creating mixed signals for the near term outlook.

Construction Output

The UK construction PMI reached a 14-month high in July (55.8) but subsequently fell in August and September. Civil engineering was the worst performing sub-category of construction work, with activity in decline, but housebuilding and commercial construction continued to increase at a solid pace.

So while the rate of construction output has slowed since July, new order books are strengthening which is creating mixed signals for the near term outlook.

Other than a slight dip in Q1 2018, London construction output has remained fairly flat over the last 12 months. Brexit uncertainty continues to impact international investment in high-end residential and commercial office projects. However, new private housing, infrastructure projects and private repair and maintenance work has helped London achieve output growth in the past 12 months.

Our regional tender price forecasts reflect these differences.