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UK construction contracts in 2017 totalled £71 billionREAD MORE

The TransPennine Route Upgrade, West of Leeds was the top project in 2017, valued at £2.25 billion READ MORE

London led contract awards in 2017, with 20% of the total and a value of around £14 billionREAD MORE

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Michael DallMichaelisBarbourABI’sLeadEconomistspecialisingin construction and the built environment. He leads on Barbour ABI’s research and outputs on the construction sector assessing the trends and developmentswhichimpactuponit.Michaelisalsoa regular contributor to Building magazine, sits on the current CPA Forecasting Panel as well as being frequently noted in construction trade and the national press.To contact Michael either:T: 020 7560 4141E: [email protected]

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E C O N O M I C C O N T E X T …

UKeconomicperformancedisappoints in 2017

UKGDPgrowthinQ32017wasunchangedfromitsinitialestimateat0.4%,withtheBankofEnglandforecasting the economy will have grown by 1.6% in 2017overall,downfrom1.9%in2016.Thisisbelowtheaveragerateof1.9%since2010(seefig.1.1).Since the start of 2014 the average growth rate has been 2.2% so it is clear that the latest statistics demonstrate a slowing rate of economic growth intheUKduring2017.Theeconomyishowevercurrently 9.7% larger than the peak before the 2008

financialcrash,demonstratingtherecoveryoverthe longer term.ThesectorbreakdownofUKeconomicgrowthshowsthat services continue to drive growth, accounting for 79.3% of output in the latest statistics. However, its rate of growth is slowing at 0.4% in Quarter 3 2017 compared to 0.5% between Quarter 3 2009 and Quarter22014(seefig.1.2).Priortotheeconomicdownturn the average growth rate was even higher at 0.8%betweenQ12003andQ42007.Theproduction

sector(whichispredominantlymanufacturing)accounted for 14% of output, with the rate of growth accelerating recently as exports have been boosted by the weaker currency. Production grew by 1% in Quarter 3 with no growth between Quarter 3 2009 and Quarter 2 2014 or between Q1 2003 and Q4 2007. Finally, construction accounted for 6.1% of output accordingtothelatestfigures.However,itwastheone sector which shrank in Quarter 3, declining by 0.7%.Thiscomparestoanaveragegrowthrateof

The UK economy has had a subdued performance in 2017 with the headline growth rate falling and infl ation rising, though the labour market continues to provide positive news.

1.6%Forecast for GDP growth in 2017

0.7% between Q3 2009 and 2014 Q2, a relatively strong period for construction. Average growth between Q1 2003 and Q4 2007 was lower at 0.4%.

UnemploymentThelabourmarketisstillprovingtobeparticularlyrobust with the level of unemployment remaining at 4.3% in the three months to October (see fig.1.3).ThisisthelowestrateofunemploymentsincetheperiodMarchtoMay1975.Formalesthe

ECONOMIC CONTE X T 1.1

UK GDP | Source:ONS


GDP sector breakdown | Source:ONS

ECONOMIC CONTE X T 1. 3

Unemployment rate | Source:ONS

-8

-6

-4

-2

0

2

4

GDP Growth quarter on previous year’s quarter (%

)

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

GDP

Grow

th q

uart

er o

n qu

arte

r (%

)

20152014201320122011201020092008 2016 2017-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Grow

th (%

)

ConstructionManufacturingProductionGDP Services

2009 Q3 to 2014 Q2

2017 Q3

2003 Q1 to 2007 Q4

70

71

72

73

74

75

76

Unemploym

ent rate (%)

-300

-225

-150

-75

0

75

150

225

300

Qua

rter

ly ch

ange

in e

mpl

oym

ent l

evel

s (th

ousa

nds)

Aug17

Feb17

Aug16

Feb16

Aug15

Feb15

Aug14

Feb14

Aug13

Feb13

Aug12

Feb12

Aug11

Feb11

Aug10

Feb10

Aug09

Feb09

Aug08

Feb08

3 month period (starting month shown)


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ECONOMIC CONTEX T… UKeconomicper formancedisappointsin2017

unemployment rate was 4.4% and for females it was 4.1%, the lowest since comparable records began in 1971. In numbers there are 1.43 million unemployed people in the three months to October, which is 26,000fewerthanthethreemonthstoJuly.Thereare783,000 unemployed men and 647,000 unemployed women,21,000fewerthanthepreviousfigure.Thenumber of people who are in employment fell slightly meaning that the rate of economic activity in the populationalsodecreased.Theemploymentratewas75.1%,downslightlyfromthe75.3%inMaytoJuly2017.Thistranslatesto32.08millionpeopleemployed,afallof56,000.Theemploymentratefor men was 79.4%, compared to 79.8% in the three months to July and 70.8% for women unchanged from the three months to July. It is worth noting that comparing both unemployment and employment rates and numbers to the same period in 2016 shows animprovingpicture.Theunemploymentrateisdown by 0.5 percentage points compared to August to October 2016 and the employment rate increased by 0.7 percentage points over the same period.

InflationInflationcontinuestoexceedthe2%targetsetbytheBankofEngland,astheweakercurrencydrivesupthecostofimportedgoodsandservices.Theinflationratewas3.1%inNovemberasmeasuredbytheConsumerPriceIndex(CPI),upfrom3.0%inOctober and the Consumer Price Index including Housing(CPIH)wasunchangedat2.8%(seefig.1.4).Thisisthehighestlevelofinflationinfiveyearsalthough recent strong increases have abated. ThemaindriverofinflationinNovemberwasanincreaseinairfares.TheothermaindriverofinflationinNovemberwasfromtherecreationandculturesector with various goods including prices for computer games rising.Themainimpactofthehigherinflationisthatrealwage growth is declining thus negatively impacting consumerspending.Afterasustainedperiodofreal

wage decline the rate had been broadly increasing sincelate2014untilthisyear.Infactthelatestfiguresshow that in the three months to October 2017 real average weekly earnings fell by 0.4% compared to thesameperiodin2016(seefig.1.5).As well as the declining levels of real wages one enduringareaofconcernfortheUKeconomyremains the low levels of productivity within the workforce.Theissuehasbecomesoimportantthat the government has recently written a national industrialstrategytoaddresstheproblem.Thescaleof the problem is clear as a comparison of output perhourworkedbetweentheUKandtherestoftheG7 countries ranks it as having the second lowest growthratebetween1997and2016(seefig.1.6).Thisappears to have remained the case throughout 2017, althoughnoofficialdatahasbeenreleased.


Inflation | Source:ONS

ECONOMIC CONTE X T 1. 5

Real wage growth | Source:ONS


GDP comparison | Source:ONS

-1.5

0.0

1.5

3.0

4.5

6.0

(%)

201520142013201220112010N F M A N F M A N F M A N F M A N F M A N F M A N F M A N

2016 2017

CPIH

CPI

%

Oct10

Oct11

Oct12

Oct13

Oct14

Oct15

Oct16

Oct17

Oct09

Oct08

Oct07

Apr07

Apr08

Apr09

Apr10

Apr11

Apr12

Apr13

Apr14

Apr15

Apr16

Apr17

Oct06

-5

-4

-3

-2

-1

0

1

2

3

4

5 CPIHNominal wages Real wages

Canada France Germany Italy

Japan United Kingdom United States

80

90

100

110

GDP

Grow

th (2

007=

100)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

OutlookInconclusiontheUK’seconomicperformancehasbeen poorer over the last 12 months with the slowing rates of economic growth leading to a downgrade in forecastsbytheUK’sfiscalwatchdogtheOfficeforBudgetResponsibility(OBR).TheOBRnowpredicttheGDPgrowthwillbe1.5%in2017downfromafigureof2%initsMarchforecasts.Thisisthenforecasttoslowfurther to 1.3% in 2019 and 2020, all well below the figuresforecastinitsMarchoutlook(seefig.1.7).With real wages falling and productivity declining

it is no surprise that the prospects for GDP growth are receding. However the labour market remains remarkablyrobustinthefaceofthesepressures.Theprospects for the economy will not be helped by the uncertaintysurroundingtheUKexitfromtheEuropeanUnion.AstheBrexitnegotiationscontinuemorecertainty will help businesses with their investment decision process and have a positive impact on GDP. However, given the lack of progress thus far it is no surprisethattheOBRhavetakenapessimisticviewand downgraded the economic growth forecasts.


UK GDP | Source:ONS/OBR

2017 2018 2019 2020 2021 2022

GDP Growth 1.5% 1.4% 1.3% 1.3% 1.5% 1.6%


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T H E C O N S T R U C T I O N S E C T O R …

Construction contracts awards held steady in 2017

ThelatestfiguresfromtheONSshowthattheconstructionsectorintheUKgrewby0.4%betweenOctoberandNovember2017.ComparingoutputlevelswithNovember2016alsoshowedanincreaseof0.4%.It is clear that the housing sector remains the main component of growth within the industry over the longer term. In particular Private Housing output increasedby8.5%inNovemberfromthecorrespondingmonth in 2016. Output in the Private Commercial

sector decreased by 2.2% year-on-year and activity in the industrial sector was 8.4% lower. Infrastructure also declined over the year with activity 8.9% lower inNovember2017comparedto2016.Traditionallythe commercial, infrastructure and housing sectors account for the majority of construction output so the falls in the former are notable. In 2018 the challenge will bewhethercontinuedgrowthinhousingcanoffsetthedeclines in the other large sectors.

In its latest forecasts the Construction Products Association expect growth of 0.7% in 2017 followed byzerogrowthin2018.Theindustryisexpectedtorecover by 2019 with growth of 2% currently predicted.Thereasonforthereturntogrowthin2019isbecauseitisexpectedthatthedealwiththeEuropeanUnionwillbeagreed,oratleastthedetailswillbeclearer.Thiswillcreate more certainty in sectors such as commercial which have been performing less well in recent months.

InadditiontothistheconstructionofthefirstphaseofHS2 is due to begin providing a boost to the levels of output.Thereareclearlyrisks,bothontheupsideandthedownside,totheseforecasts.Thepotentialofa“nodeal” Brexit or any delays to HS2 would clearly hamper these forecasts. And for that reason the lower scenario forecast predict declines in growth.TheCPA/BarbourABIIndexwhichmeasuresthelevelof contracts awarded using January 2010 as its base monthrecordedareadingof124forDecember.ThisisaslightdecreasefromNovemberbutstillindicatesagrowingindustry.ThereadingsforPrivateHousingincreased this month, but there were declines in industrialfactoriesandcommercialoffices.

Construction SectorThevalueofallconstructioncontractsawardedintheUKin2017,accordingtoBarbourABIdataonall contract activity, was £71.0 billion showing a

Marginal improvement in the value of new construction contracts awarded in 2017 indicates stability following 5% decrease in 2016.

0.4%Increase in activity from November 2016

% change

Nov 2016 – Nov 2017 Oct 2017 – Nov 2017

Total All Work 0.4 0.4

All New Work 0.0 0.4

• Public Housing 3.5 2.9

• Private Housing 8.5 4.1

• Infrastructure -4.1 -4.3

• Public(exInfrastructure) -8.9 0.7

• Private Industrial -8.4 -9.3

• Private Commercial -2.2 0.2

Repairs & Maintenance 1.2 0.5

• Public Housing -3.9 -1.1

• Private Housing 4.1 1.3

• Non-Housing 0.2 0.3

CONSTRUCTION SECTOR 2.2

CPA/Barbour ABI Index | Source: Barbour ABI

0

100

200

300

400

500

600

700

All New Build Private Housing

Commercial Offices

Commercial Retail

Industrial Factories

F M A M J J A S O N D J F M A M J J A S O N D

Cont

ract

s Aw

arde

d In

dex (

Jan

2010

= 10

0)

2016 2017


Construction activity by sector | Source:ONS

CONSTRUCTION SECTOR 2. 3

Growth forecasts | Source:ONS/CPA

2017 2018 2019

Construction Growth 0.7% 0.0% 2.0%


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CONSTRUCTION SECTOR… Construction contract s awards held steady in 2017

marginal(0.6%)increaseon2016.Thisfigurefor2017shows that contract awards values have steadied somewhat in 2017, following 5% decrease in project awardsin2016.Thisprovidessignificantcontrastto the pattern of good growth for contract values between 2011 and 2015.Thetrendforvolumereductionalsocontinuedin2017 with the number of projects for the year falling by 1.7%, from 11,478 in 2016 to 11,281. Whilst this represents a slowing of the rate of decline, compared with 3.2% reduction in 2016 and 4.7% decline in 2015, it contrasts with the good annual growth rates of 22.7% in 2012, 21.0% in 2013 and 10.4% in 2014.

Projects by RegionLondon was the leading region for contract awards in2017with20%oftheUKtotalandvalueofaround£14billion.MajorprojectawardsinLondonincludedthe£1.3billionChilternTunnelscontractwhichispartofHS2.TheSouthEastwastheregionwiththesecond highest proportion of construction contracts byvaluein2017with12%ofcontractawards.ThelargestcontractawardfortheSouthEastregionin2017 was the £400 million contract for the Port of DoverTerminal2project.TheNorthWestalsohad12%ofcontractawardsin2017,withtheTraffordParkMetrolinkschemeestimatedat£350milliononeoftheleadingcontractawards.TheWestMidlandsalso featured in 2017 with 11% of contracts awarded throughout the year and boosted by the award of £3.7 billion of HS2 works in September.Other major projects awarded in 2017 included the TransPennineRailRouteUpgradenearLeedsvaluedat an estimated £2.2bn. One of the major contracts

intheEastofEnglandwasthe45MWIntegratedWasteManagementFacilityatRivenhallAirfield,with an estimated value of £679 million and due for completion in 2022. Additional power generation contracts include the £460 million mechanical and electrical works package for Hinckley Point C nuclear power station in the South West region. Whilst in the NorthEast,the41.5MWBlythOffshoreWindfarmwillprovide 5 wind turbines as part of a demonstration project and has an estimated value of £300 million.

Types of ProjectResidentialhadthehighestproportionofcontractawards value in 2017 with 35% of the total, an increase of2%on2016.Majorresidentialprojectsawardedin 2017 include the Wembley Park development to provide 458 units with a completion date of 2020 andvalueestimatedat£155million.IntheNorthWest, the £135 million redevelopment of the former BBCBroadcastingHousesiteinManchesterwillseetheprovisionof411flatsandapartments.WhilstintheWestMidlandsthe£77.2millionBristolStreet/Hope Street contract in Birmingham deliver a total of 778flatsandapartments.Thesecondlargestsectorwasinfrastructurewith29% share of total contract awards value in 2017 whichwasanincreaseof2%on2016.Railprojectswere a key feature for infrastructure in 2017 with theTransPennineRouteandHS2accountingfor7 leading infrastructure contracts in 2017, with an estimatedcombinedtotalof£9.4billion.Energyand power projects have also underpinned the infrastructure sector with a number of energy fromwasteschemes,offshorewindfarmsandgas turbine projects featuring prominently. Other larger contracts included the £300 million ThirlmeretoWestCumbriawatermainsprojectandthe£100millionM5OldburyViaductintheWestMidlands.

CONSTRUCTION SECTOR 2. 5

Construction activity trendsSource: Barbour ABI

Num

ber of Contracts

0

3250

6500

9750

13000

Valu

e (£

mill

ion)

201620152014201320122011 20170

20000

40000

60000

80000

Rank Project Value (£m) Region Sector

1TransPennine Route Upgrade – West of Leeds

2250 Yorkshire & Humber Infrastructure

2 MarketTowers,1NineElms,TwinTower 900 London Hotel, Leisure

&Sport

3 EustonTunnels&Approaches – HS2 900 London Infrastructure

4 Long Itchington WoodTunnel–HS2 900 West

Midlands Infrastructure

5NorthQuay,Poplar–offices,1243flats,shops&restaurants

800 London Residential

645MWIntegratedWasteManagementFacility–Rivenhall

679 EastofEngland Infrastructure

7 1-5 Grosvenor Place – Belgravia 500 London Hotel, Leisure

&Sport

8 RiversideEnergyPark, Belvedere 500 London Infrastructure

9 SpaldingEnergyExpansion 450 East

Midlands Infrastructure

10 Port of Dover – Terminal2 400 SouthEast Infrastructure


Top ten biggest projects by valueSource: Barbour ABI


Locations of contracts awardedSource: Barbour ABI


Type of projects | Source: Barbour ABI

Residential

Industrial

Commercial & Retail


Medical & Health

Education

Infrastructure

10

29

92

35

7

%8

7%

3%

9%

11%

3%

9%

11%7%

7%

20%

12%

East Midlands

East of England

London

North East

North West

Scotland

South East

South West

Wales

West Midlands

Yorkshire & Humber


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