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Broad Optimism, But Cost Pressures Building

Our latest surveys show a broadening recovery in construction. Optimism has been distributed evenly across building contractors, SMEs, specialist contractors, civil engineers and product manufacturers, driven by growth in the private housing, commercial and publicly-funded health and education sectors.

Trade surveys throughout 2013 pointed to a rise in orders and enquiries for construction firms. In the latest Construction Trade Survey for 2014 Q2, it appears that this has translated into a much-awaited increase in workloads and output across the UK’s construction sector. Highlighting the burgeoning recovery that has emerged during 2014, building firms and construction product manufacturers have recorded the strongest growth in workloads and sales since before the financial crisis of 2008 and registered a sharp improvement from even six months ago.

Momentum is set to continue given a sharp uptick in forward-looking sentiment. The return of output growth and a further rise in orders is set to provide support over the next 12-18 months, but has been accompanied by an uptick in costs. Among respondents, it is clear that the key issues in construction have shifted to higher costs and the availability of skilled labour.

Capacity

Capacity that was left idle during the recession is now being absorbed as firms respond to higher demand. 45% of building contractors and 43% of specialist contractors reported capacity utilisation at 90% or above in Q2, compared to 15% and 27%, respectively, at the end of 2012. Naturally, as the recovery in demand and expected growth in new work puts pressure on the upper bounds of current capacity, firms have raised hiring intentions. However, difficulties in recruiting skilled trades such as bricklayers, carpenters and plasterers have been flagged as a key constraint among firms in the Q2 survey.

Tighter capacity and labour supply issues have been identified as a key source of cost pressure on construction firms. Three-quarters of building contractors reported that their wage bill increased in Q2, up from 50% in Q1 and 22% in 2013 Q2. This was also the case for construction product manufacturers, with 95% of heavy side and 80% of light side firms citing wages as their primary cost concern. Looking forward, in addition to more hiring, the prospect of firmer demand pushing firms nearer to full capacity has led to increased investment intentions. Capital investment is a key priority for product manufacturers over the next 12 months, notably in plant and equipment. 

Rising profits on the horizon

In contrast to the weak market conditions between 2009 and 2013, the stronger economy is driving household demand and raising the price at which consumers are willing to pay for goods and services. As real wage growth picks up later in the year, this will be welcome for firms battling rising costs and should spur a return to profitability. Contractors and civil engineers have begun to report a rise in tender prices, but the impact on profits has been muted so far. On balance, 5% of building contractors reported a rise in profit margins in Q2; 11% of specialist contractors reported decreasing profit margins, on balance.

The Q2 survey has produced the most favourable result in seven years, but serves as a reminder that a full construction recovery spans much more than rising sales or output. 

By Rebecca Larkin at 22 Aug 2014, 12:27 PM

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For enquiries please contact: Emma Salmon emma.salmon@constructionproducts.org.uk

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