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01 The state of play

There are still reasons to be cheerful in the construction industry, according to Experian Business Strategies’ latest survey. So far any problems the industry is encountering as a result of liquidity problems in the credit markets have yet to surface in our results. The overall activity index climbed by one point to 58 and the orders and tender enquiries indices strengthened to 74 and 63, respectively. In addition, many respondents also remained optimistic about future employment in the industry.

Downside risks are, however, intensifying. Higher borrowing costs may have significant implications. Contractors tend to operate a high-volume, low-margin strategy, giving them little scope for manoeuvre in such conditions. If escalating costs can not be transferred to clients, some projects may no longer be economically viable.

Indicators remained positive for the residential and non-residential sectors in October, although civil engineering’s were considerably weaker. Residential indicators were buoyant, considering the housing market is slowing. Its activity index remained at 54, while orders and tender enquiries were higher than usual for the time of year. Non-residential’s activity index stood at 58 and respondents also reported high levels of interest in future work. Civil engineering’s index declined by 18 points to 50, suggesting a stagnation in activity levels. The civil engineering sector tends to be more volatile than the other two, partly because of the relatively large size and complexity of some civil projects. Forward-looking indicators, however, were encouraging.

02 Leading construction activity indicator

The leading activity indicator, Experian Business Strategies’ short-term industry forecasting model, predicts that construction activity will continue to rise steadily over the next quarter. The indicator is forecast to remain at 58 in November and December, before dropping a point in January.

The leading activity indicator uses a base level of 50 – above that level shows an increase, below that level a decrease.

03 Labour costs

As labour is the major input into most construction projects, containing wage inflation is a key concern for contractors. Today, with rising global demand and stubbornly high oil prices exerting pressure on materials prices, controlling labour costs is more essential than ever before.

For the majority of firms (66% of building respondents and 62% of civil engineering firms) annual labour cost inflation is reasonably manageable, running at less than 5%, but some face a significantly greater challenge. The proportion of both building and civil engineering firms reporting less than 5% inflation in labour costs three months ago was, however, slightly higher, suggesting there has been a marginal deterioration since then.

16% of building firms and 31% of civil engineering firms reported inflation of between 5% and 7.5%. For the remaining respondents annual labour costs were up by more than 7.6%.

04 Regional perspective

Our composite indicators suggest prospects for construction are sound across all UK regions. Indicators for some regions fell and others rose, but all were higher than 50, the level which suggests further growth in activity is unlikely. A robust, 12-point, increase in the Welsh indicator was sufficient to give it a clear lead over the other regions – at 75, it was four index points clear of Northern Ireland, its nearest rival.

Composite indicators for six of the remaining regions also rose during October, although most increases were small by comparison. The North-east, East Anglia and North-west recorded respective increases of four points, two points and one point in their composite indicators. Yorkshire and Humberside and Scotland’s indicators, however, were a little stronger climbing by eight points and seven points. The South-east’s indicator stood firm at 63 for the second consecutive month.

Firms operating in the Midlands continued to suggest there is further scope for growth, but with a little less conviction than in September. Composite indicators for both the East and West Midlands declined in October, but only by a point or two.

Experian Business Strategies’ regional composite indicators incorporate current activity levels, the state of order books and the number of tender enquiries received by contractors to provide a measure of the relative strength of each regional industry.