Tender prices have risen significantly in 2017 so far, but with output remaining unchanged in 2018, and with uncertainty about the effect of Brexit negotiations in the private commercial sector, tender prices are expected to fall in the year to 3rd quarter 2018, according to the latest BCIS five-year forecast.

122 Leadenhall Street (the 'cheese grater')

The current forecasts are based on the UK’s exit from the EU at the end of the two-year period following the signing of Article 50, but now assume that this is followed by a ‘transitional period’ of two years.

Based on the most recent data from the Office for National Statistics (ONS) for 2017, new work output for 2017 is now expected to rise by 3.7%. In 2018, it is anticipated that new work output will remain unchanged, resulting primarily from a sharp fall in private commercial output, which continues in 2019, leading to modest growth in new work output of 1.1%. Stronger growth in new work output in 2020, 2021 and 2022 of 4.2%, 5.7% and 4.7% respectively is predicted to be driven by strong growth in infrastructure output and a return to growth in the private commercial sector.

While almost any outcome is still possible, BCIS will continue to produce forecasts based on three scenarios. These reflect the different political outcomes from the exit negotiations from the EU and are equally likely. BCIS has revised the three scenarios in the light of recent announcements from the government regarding Brexit. The uncertainty of the results of the Brexit negotiations will undoubtedly lead to BCIS revising its assumptions again as more is known.

In all scenarios, it is assumed that there will be no change of UK government over the forecast period, that there is political stability in the rest of the world, and that a gradual rise in interest rates puts pressure on consumer spending.

Three scenarios:

  • An 'upside' scenario based on the following assumptions – The UK remains a member of the EU but with no voting rights from cessation of the two-year period following the signing of Article 50. A transitional period of two years follows, with continued payments to the EU (which will be deducted from the final 'divorce bill'). Negotiations run a lot smoother than with the 'central' scenario, providing investors with greater clarity at an earlier stage. It is assumed that following the end of the transitional period, any trade agreements with the EU will be the same as prior to the EU Referendum, and those with the rest of the world will boost the UK economy. Sterling exchange rates are expected to remain depressed until the end of the transitional period, then return to pre-EU Referendum levels thereafter, with a consequential reduction in imported materials prices. Free movement of labour continues to the end of the transitional period, with an exemption on movement of operatives in the construction industry thereafter. It is assumed that it remains desirable for EU workers to work in the UK, and that demand for construction operatives in the EU remains unchanged. The economy picks up during the transitional period as confidence returns.
  • A 'downside' scenario based on the following assumptions – Based on the assumption that the UK has a 'hard Brexit' at the end of the two-year period following the signing of Article 50, i.e. from 1st quarter 2019. It is assumed that following withdrawal from the EU, any trade agreements with the EU are a lot less favourable than prior to the EU Referendum, and there are restrictions on the movement of labour. It is assumed that Sterling exchange rates worsen, which adversely affects the price of imported materials and the desire of EU construction workers to work in the UK. The UK starts paying a 'divorce bill' from 1st quarter 2019. The economy goes into recession during the transitional period and only recovers at the end of the forecast period.
  • A 'central' scenario based on the following assumptions – The UK remains a member of the EU but with no voting rights from cessation of the two-year period following the signing of Article 50, i.e. from 1st quarter 2019. A transitional period of two years follows, with continued payments to the EU (which will be deducted from the final 'divorce bill'). It is assumed that following the end of the transitional period, any trade agreements with the EU are less favourable than prior to the EU Referendum. Sterling exchange rates are expected to remain depressed until the end of the transitional period, then gradually return to pre-EU Referendum levels thereafter. Free movement of labour continues to the end of the transitional period, with restrictions in movement after that. It is assumed that it remains desirable for EU workers to work in the UK, and that demand for construction operatives in the EU remains unchanged. GDP recovers slowly towards the end of the period as confidence returns.

The terms 'central', 'upside' and 'downside' reflect the impact of the scenarios on construction demand, rather than the outcome for construction tender prices.

BCIS has assumed that 'No deal' is very unlikely to occur as one of the EU exit options.

The consequential effects of the three scenarios for tender prices follow:

  • Tender prices will rise by 4% over the first year of the forecast period, then rise to 28% above current prices by 3rd quarter 2022 (‘upside scenario’)
  • tender prices will fall by 2% over the first year, then recover to a rise of 19% above current levels by 3rd quarter 2022 (‘central forecast’); and
  • tender prices to fall by 9% over the first two years, with a recovery to 9% above current levels by 2nd quarter 2022 (‘downside scenario’).

BCIS is publishing the 'central' scenario as the forecast for the price and cost indices but it should be borne in mind that each forecast is equally possible.

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