Future growth in doubt as market uncertainty continues

Mace’s cost consultancy business has published its tender price forecast for Q3 in the UK, which has revised up the national forecast for inflation in 2017 to 1.5% in 2017.

However, with increasing business rates hitting an already expensive market along with stamp duty changes continuing to dampen top-end residential demand, prices in London will remain unchanged.

The construction sector, which saw output fall 1.4% in the third quarter and is now in a technical recession, is expected to weaken next year as Brexit drags on growth. While there has been some stabilisation in the industry following several years of strong increases, the expectation is that this weakness will result in increasingly competitive bidding with margins potentially taking a slight hit, helping to temper the impact of the falling pound. Tender prices could drop in 2018 as the uncertainty caused by Brexit continues but we see less inflationary pressure from imports.

With the uncertainty surrounding the UK’s exit from the EU, the concern is that construction could be hit especially hard as businesses try to cut costs and delay investment. So far, the government has kept its cards close to its chest on the type of deal they’re aiming for but recent indications are it will be for more of a hard Brexit than had previously been hoped.

The downward pressure is therefore likely to have an impact across the supply chain; fears around order books, which currently look strong, will increase and firms will become more competitive in their bids. Due to the number of tiers in the supply chain, a small reduction in margins at each level could result in a much larger impact than anticipated on the final tender price.

Chris Goldthorpe, Managing Director of cost consultancy at Mace, said: “In recent months we have seen contrasting fortunes between different sectors. Residential property, particularly mid-range homes, has performed well with a number of large projects coming on stream. However, due to the uncertainty caused by Brexit, we have seen a drop-off from the commercial sector as they hold back on investment, waiting for more clarity around leaving the European Union.

“The Government’s decision to give the go-ahead for Hinkley Point C as well as reaching a decision on expanding Heathrow are both very positive moves, providing short-term support for the construction industry and a longer-term boost to the economy. However, uncertainty is set to continue with economists still to decide whether the market will flourish or flounder.”

Mace’s Cost Consultancy business produces a quarterly UK Tender Cost Update, offering a snapshot of construction market conditions and movements to help businesses spot and understand trends across the industry and plan accordingly.