Tender price inflation forecast
Construction sector surveys remain optimistic, despite output falling
Despite the economy returning to growth and new orders increasing sharply during the first quarter of the year, construction output contracted for the second successive quarter.
It would be easy to conclude from the latest output data that the sector was performing badly, however forward-looking indicators continue to point to a positive outlook.
The April S&P Global UK Construction PMI reported activity rising at the fastest pace for 14 months, with continued improvement in order books. The survey reported that commercial construction and civil engineering both provided a solid contribution to overall growth.
The overall index reading accelerated from 50.2 in March to 53.0 in April. A reading above 50 suggests output is expanding, and below 50 a contraction in activity. The outlook for the near future remains optimistic, with new work increasing for the third consecutive month, supported by a boost in sales due to an improving domestic economy. Additionally, supplier lead times have shortened significantly this year, thanks to improved materials availability and softer demand for construction inputs.
The Royal Institution of Chartered Surveyors (RICS) Q1 UK Construction Monitor also paints a slightly more optimistic picture. The survey reports the headline net balance of workload moving from a reading of -8 in Q4 to 0 in Q1. Infrastructure was the best-performing sector, with respondents reporting a rise in workloads.
New business enquiries reportedly picked up during Q1 to their most positive reading since Q3 2022, which also suggests an encouraging outlook.
The responses are based on inflation falling to the Bank of England’s 2.0 percent target and the Bank Rate coming down to help stimulate the economy. However, the timing of the first rate cut is still uncertain.
Another big driver of tender prices is construction costs. Construction material prices have been in deflationary territory since June 2023. The Department for Business and Trade's (DBT) 'All Work' material price index fell by 2.3 percent on the year to March 2024 - this follows the -1.9 percent fall recorded in February.
For other new works, this measure of inflation is showing a much faster decline of -4.0 percent in the year to March, down from -3.0 percent in February.
Source: Department for Business and Trade
The DBT All Work index is still 34.9 percent higher than before the start of the pandemic and the current annual inflation rates have a base effect - as we are comparing low prices now to the higher prices seen a year ago. Nonetheless, there are signs of further price falls ahead as material product demand weakens.
The Builders’ Merchants Federation reports that volume sales were -7.5 percent lower, with prices up 3.1 percent in the year to February 2024. In the same period, eight of the 12 categories recorded higher sales, such as work and safety wear, and decorating. But the two largest categories, timber and joinery products (6.4 percent) and heavy building materials (7.9 percent), both saw sales fall.
Several key building materials recorded price falls in Q1 2024 over Q1 2023, the largest being concrete reinforcing bars, structural steel and gravel, sand, clay. However, the price of flexible pipes and fittings, metal doors, windows and ready-mixed concrete experienced strong price growth in the same period .
Source: Department for Business and Trade, Lets Recycle and ONS. Note: DBT construction materials data up to March 2024
Despite reports of a construction labour shortage, wage inflation in the sector is easing according to ONS data. In the year to February 2024, construction sector nominal wage growth eased to 3.4 percent, a sharp slowdown from the 6.4 percent seen in the 12 months to December.
In the rolling three months to February 2024, unemployment in construction reached 41,000 people, up by 5,000 compared to the previous three-month rolling period. Redundancies in the sector, having reached a recent peak of 11,000 in Q4 2023, have fallen to 9,000 in the three-months to February. Since last October, vacancy levels in construction have steadily edged up from 33,000 to 37,000.
The number of construction sector insolvencies continued to rise to record levels in 2023. We have noted previously that, until the economy is on a sure footing, contractors and sub-contractors are expected to select smaller, more manageable projects to deliver on.
What does this mean for our forecast?
With weak construction sector demand, material prices falling and sector nominal wage inflation easing, we have revised down our real estate tender price forecast (TPI) for 2024 from 3.2 percent to 3.0 percent. Although the economy returned to growth in Q1, the outlook for 2024 is still for only a modest improvement. Lower interest rates should bring much-needed confidence to the sector and boost growth prospects; however, the first rate cut might not be until late summer. Given the economic uncertainty we have kept our 2025-2028 real estate TPI forecast unchanged from the Q1 UK market intelligence report.
Figure 7:
Tender price inflation: annual percentage changes
Source: Turner & Townsend survey
Our forecasts are representative for the UK as a whole and inflation may vary by project size, value, procurement route and region. Projects need to be assessed on an individual basis and may not always align to our central scenarios. For further assistance on cost assurance and inflation analysis in your area, please contact Turner & Townsend.
Although new orders picked up sharply in Q1, they have been weak for much of the past year. Forward looking surveys are optimistic for the outlook, however this positivity rests on the Bank Rate coming down. Material prices have been falling and wage inflation easing, while capacity is loose with construction insolvencies rising in Q4. These factors are driving our 2024 and 2025 forecasts. Beyond 2025, we expect lower interest rates to have a stimulatory impact with sector demand expected to improve.
Although infrastructure new orders have been weak since the final quarter of 2022, the outlook is brighter with several potential investments in the pipeline. These include the proposal for the water sector’s Asset Management Period 8, in the rail sector for the Control Period 7 and the proposed building of Sizewell C nuclear power plant for the energy and natural resources sector. As a result, we expect infrastructure TPI to remain on the high side at 4.5 percent for 2024, increasing to 5.0 percent over the forecast horizon to 2028.
Source: Turner & Townsend survey
Source: Turner & Townsend survey
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