This report will explore the following key questions with regard to civil engineering construction in the UK:

• How have the individual sectors of the civil engineering market performed over the last five years?

• What is the impact of legislative and regulatory measures on civil engineering construction activity?

• How have the key players in the industry performed financially in recent years?

• What are the key drivers for growth over the next five years?

• What are the growth prospects for civil engineering activity over the next five years?

The definitions used in this report for the civil engineering sector are from the Office for National Statistics (ONS), which broadly defines the sector as constituting new infrastructure. There are a number of sectors that are defined within this sector comprising both public and privately financed projects.

The sectors include the following:

Water: Comprising the construction of reservoirs, purification plants, dams (except for hydro-electric schemes), aqueducts, wells, conduits, waterworks, pumping stations, water mains, hydraulic works, etc.

Sewerage: Comprising sewerage disposal works, the laying of sewers and service drains.

Electricity: Comprising building and civil engineering work for electrical undertakings such as power stations, dams and other works on hydro-electric schemes, sub stations, laying of cables and the erection of overhead lines.

All values quoted in this report are at current prices unless otherwise specified.

Reports are researched and written by MBD’s in-house, specialist business-to-business consultants. Research is based on both an analysis of official information and on original trade research, providing both a quantitative and qualitative view of the market. MBD’s unique range of frequently updated reports provide an integrated body of ongoing research, enabling deep understanding of the prevailing trends and of the drivers of these trends based on trade opinion.

The following abbreviations have been used in this report:

Civil engineering’s proportional importance to all new construction work has increased as the market has been far less affected by the banking crisis and subsequent recession/economic stagnation than the construction industry.

Table highlights:

• Civil engineering is largely determined by the long-term pricing restrictions of industry regulators. Consequently, the economic vagaries that have strongly restricted other construction sectors after the banking crisis have had little impact on market growth in recent years. However, some sectors have been restricted by public spending cuts, particularly the roads sector, and by the reduced availability of funding for privately-financed projects . As such, the industry is not totally immune from economic conditions.

• The civil engineering contracting industry represents a relatively fragmented sector with most large operators serving the entire market. Even so, it tends to be more highly concentrated than many other construction sectors due to the longer lead times associated with civil engineering projects and the extensive size of many contracts. International comparisons demonstrate a high level of contractors in the UK.

Figures for Q4 2013 indicate that GDP grew by 0.7%, slightly lower than the 0.8% recorded in both Q3 and Q2. This indicates that full year growth for 2013 was the strongest in six years, but the magnitude of the economic downturn, and the flatness of subsequent activity, means that even with such growth the economy was still 1.3% below the level of output in the first quarter of 2008. For Q1 of 2014, the ONS reported that growth increased again to 0.8%, the fifth consecutive period of GDP growth, but the economy remained smaller than at its peak in 2008. In April 2014, strong manufacturing output indicated that the UK economy was close to regaining its pre financial crisis level of economic activity.

GDP in the UK grew steadily from 2000 until early 2008, at which point a financial market shock affected UK and global economic growth. Up until that point, services in the UK had continued to grow steadily, while production output had been broadly flat over the same period. Construction activity grew strongly in the early part of the decade and although there was a temporary decline in the mid2000s, this was reversed by the end of 2007. The deterioration in general economic conditions during 2008/09 was more acute in the construction and production industries, but less pronounced in the service industries.

Economic growth resumed towards the end of 2009, but at a slower rate than prior to 2008. The services industries grew steadily, if slowly, during this period, with activity exceeding the level previously seen in early 2008 by Q3 2013. By contrast, production and construction activity grew in 2010 but did not sustain this growth, and as a result has not yet returned to predownturn peaks. Although there has been widespread growth since the start of 2013, the service industries remain the largest and steadiest contributor to economic growth. In Q1 2014, GDP was estimated to be 0.6% below the peak in Q1 2008.

From the peak in Q1 2008 to the trough in Q2 and Q3 2009, GDP decreased by 7.2%. Previous economic downturns in the early 1980s and early 1990s did not see the same level of impact on GDP. In the early 1990s downturn, GDP decreased by 2.9% from the peak in Q2 1990 to the trough in Q3 1991. From Q2 1979 to Q1 1981, a period which included a quarter of positive growth, GDP decreased by 5.9%; while over five consecutive quarters of falling GDP beginning in Q1 1980, GDP decreased by 4.6%.

In May 2014 the Bank of England was predicting growth of 3.4% for 2014, but increased its prediction for 2015 to 2.9% from a previous expectation of 2.7%. At the same time, the Bank of England reduced its growth forecast for 2016 from 2.9% to 2.8%.

The UK inflation rate measured by the Consumer Prices Index (CPI) fell to 1.6% in March 2014 from 1.7% in February and 1.9% in January 2014, according to the ONS. It was the third consecutive month inflation was below the Bank of England's 2% target rate, following four years when inflation had been above this target. In April 2014 the CPI rose to 1.8%, the first increase in the rate for 10 months.

The April 2014 rise was mainly attributed to rises in the cost of transport, which pushed overall annual inflation up 0.4% on its own. This reflected an 18% monthly rise in air fares and a 22% rise in sea fares, largely attributed to Easter falling in April in 2014 as opposed to March in 2013. Despite the increase in the CPI inflation measure, the rate is still below the Bank of England's 2% target for inflation. In May 2014, the Bank of England identified that it expected the rate of inflation to remain below its target for the next two years.

The rate of inflation as measured by the Retail Prices Index (RPI) was unchanged at 2.5% in April 2014 according to the ONS.

The Bank of England's Monetary Policy Committee (MPC) continues to hold interest rates at 0.5%, and has done since March 2009.

BOE governor Mark Carney said in August 2013 that before interest rates can rise, the unemployment rate needs to fall below 7%. That stipulation was part of Mr Carney's policy of giving forward guidance. The idea is to create more certainty for businesses and individuals about the course of interest rates, which may encourage borrowing and investment. He has forecast that it will take about three years for unemployment to reach his target, suggesting no rise in interest rates before 2016. However, in March 2014, the BOE warned that interest rates could rise six-fold by 2017 as the UK economy becomes one of the fastest growing in the developed world.

Gross fixed capital formation (GFCF) is reported to have increased by £1 billion (1.9%) to £55.9 billion compared with the previous quarter in Q4 2013, according to revised figures issued by the ONS. In Q4 2013, business investment rose by an estimated £0.8 billion (2.4%) compared with the previous quarter and was 8.7% higher than in Q4 2012. GFCF and business investment have increased, quarter-on-quarter, in each of the last four quarters. This is the first time four consecutive periods of growth have been reported for more than six years, the last time was between Q4 2006 and Q3 2007.

Within GFCF there was an increase in investment in all five assets for the first time since Q2 2011.