While it is impossible to look to 2019 without mentioning Brexit, the near-term outlook for construction activity has already been shaped by the uncertainty since the 2016 referendum.
The commercial offices sector is a prime example of the lagged effects of this.
New orders have almost halved since the vote, and with fewer projects to replace those now completing, offices output is set to be dragged down sharply over the next 12 months.
Offices stands out as the weakest performance in the CPA forecasts but overall construction activity in 2019 will be a balance between the falls of commercial and public sector new-build, and the continued expansion of housebuilding in the regions and the start of major infrastructure projects.
It is materials costs that have been a key concern recently, and although price movements can be hard to predict, looking back over the last two-and-a-half years can give some pointers.
Exchange rate weakness has driven price rises for imported materials, in particular timber and steel products. Plywood, sawn wood, kitchen furniture, concrete rebar and fabricated structural steel have displayed the largest upward price movements this year.
The prospect of further episodes of sterling volatility during the bumpy negotiation process – in terms of both domestic and EU tensions – signals that imported materials inflation may linger.
Conversely, a smooth withdrawal agreement and transition after 29 March would stabilise and even strengthen the currency and help to ease inflationary pressure on imports.
The Brexit deal is still the great known unknown when looking to 2019.
One that moves us to a transition period will most likely keep things ticking along; a no deal situation presents us with – pun intended – material risks.
“Other industry trade surveys highlight how the combined pass-through of higher raw materials and energy prices is squeezing the already-tight profit margins of contractors”
First instinct is to look at potential trade tariffs, but the recent inflation has shown that industry can largely deal with inflation, and are used to doing so as part of economic cycles.
Construction hasn’t had to deal with non-tariff barriers for a long time, however. The just-in-time business model that most of construction runs on will have to contend with the unknown quantities of possible delays at ports, administrative costs and procedures, and driver and haulage issues.
Again, softwood timber and steel are most vulnerable, but electrical components and heating, ventilation and air conditioning equipment are among our top-traded construction products.
Beyond Brexit, wider developments in global commodity markets may also have an effect on construction materials prices, with fuel a significant input cost for heavy side, energy-intensive product manufacturers.
Crude oil averaged $73 per barrel in Q3, 45.5 per cent higher than a year earlier and fuel costs were the biggest inflationary pressure reported by product manufacturers in the CPA’s state of trade surveys since the start of the year.
Other industry trade surveys highlight how the combined pass-through of higher raw materials and energy prices is squeezing the already-tight profit margins of contractors.
With work volumes forecast to decline in the commercial and public non-housing sectors, which together account for over one-quarter of total construction output, the risk of suicide bids to secure contracts would be courting disaster in this rising cost environment.
I think the phrase to use is ‘interesting times’.
Rebecca Larkin is senior economist at the Construction Products Association