Despite uncertainty ahead of the General Election, the forecasts for 2020 are unchanged in Mace’s latest tender cost update, for Q4 2019, predicting growth of 1.5% nationally
While material price inflation has eased this year, annual growth in regular earnings for construction stands at 5.6%, the second fastest growth rate in over a decade. However, due to ongoing uncertainty, construction output is marginally lower than six months ago and tender costs remain unchanged.
Falling house prices and investment reluctance due to Brexit are the factors that have led to a large reduction in new construction orders. This uncertainty has particularly impacted new orders in the commercial sector, which have almost halved in the second quarter of 2019, with business still struggling to understand and predict a Brexit outcome and what it would entail.
Further signs of pressure come from a potential turn in the labour market, with a weakening economy leading to higher unemployment.
With a third quarter growth of just 0.6% for construction output, Mace’s tender cost update warns of further market headwinds in 2020.
Tender price forecast
Mace continues to expect a limited increase in tender prices forecast for next year due to lack of positive economic data. Also, a Conservative majority may provide an initial boost in confidence, but this would only prove temporary, and is another reason for the forecast.
Material price pressures have eased dramatically this year and with commodity prices subdued, as well as the pound’s appreciation, they appear unlikely to pick-up in 2020.
GDP may have returned to growth, but conditions remain tough. GDP grew 0.3% in the third quarter meaning the economy avoided entering a recession. However, compared to the same quarter a year ago, GDP was only 0.9% higher, its weakest yearly increase since 2010, and over the past six months, the economy has barely improved. Construction, where output increased 0.6%, was the fastest growing sector.
Conditions in the labour market are starting to deteriorate. In the three months to August, unemployment rose to 3.9%, while there was a small drop in earnings growth. Vacancies slipped to their lowest level since 2017.
With some surveys also reporting job losses it appears that the lagged effect of a weakening economy leading to higher unemployment is finally starting to occur.
Steven Mason, managing director at Mace, said: “The construction market continues to be remarkably resilient despite the global economic and UK political uncertainty. Whilst the slowdown in material price inflation offers the industry some level of respite, this is being off-set by the sustained growth in labour costs and the subsequent pressure on supply chain margins.
“Against the backdrop of this mix of contrasting and often conflicting economic and market performance data, we expect only a limited increase in tender prices next year and have maintained our forecasts with our predictions in the last quarter.”