UK Construction Market Report 1Q 2023
Other factors
Economic outlook
UK
According to ONS estimates, GDP grew by 0.1% in November. This rise follows an increase of 0.5% in October, an unexpected boost that came from higher food and beverage purchases during the World Cup, which helped to offset the impact of strikes.
With these augmented GDP figures, there are hopes that the UK may avoid entering recession as it misses contraction in the fourth quarter if December’s figure does not fall by 0.5% or more.
Whilst the UK may avoid a 2022 recession, many are cautious about the outlook in 2023. Even with hopes of inflation reducing, the Resolution Foundation warns that real pay has shrunk and three-quarters of UK adults reported in November that they were trying to cut back on overall spending.
Forecasts of increasing unemployment, reflecting high costs and reduced consumer spending, are set against a backdrop of companies struggling to find workers. Economic inactivity is rising due to growth in early retirement and rates of long-term sickness, with more working-age adults neither in work nor job hunting.
Data from the ONS shows that retail sales volumes are estimated to have fallen by 1% in December 2022, following a fall of 0.5% in November, with feedback from retailers that consumers are cutting back on spending due to increased prices and affordability concerns. Food stores sales volumes also fell in December by 0.3%, following a rise of 1% in November, with comments suggesting that consumers bought early for Christmas.
Adding to fears, the S&P Global/Chartered Institute of Purchasing and Supply (CIPS) flash composite Purchasing Manager’s Index (PMI), which tracks private-sector economic activity, dropped to 47.8 in January from 49.0 in December. This figure was the bottom end of economist’s forecasts in a poll conducted by Reuters and the lowest since January 2021. Readings below 50 indicate falling output.
Chris Williamson, S&P Global’s chief business economist, said, “Weaker-than-expected PMI numbers in January underscore the risk of the UK slipping into recession.” Survey respondents were concerned about higher Bank of England interest rates, strikes and weak consumer demand.
The Bank of England and the OBR both forecast that the economy will shrink in the first half of 2023. However, predictions are that the recession will be much shallower than those caused by the financial crisis and COVID-19 pandemic.
Similar to our Autumn Report, respondents had mixed opinions on the level of impact a downturn would have on construction. Just over a quarter (26%) of respondents believe the industry will be heavily impacted, slightly down from 31% last time.
Over 60% consider the impact of a contraction to be neutral, as a slowing in the market would help rebalance the industry after the challenges — for instance, allowing supply chains to catch up with demand.
One in ten survey respondents, just one percentage point different to our last report, think a recession will not detrimentally impact construction as there is a strong pipeline of work, particularly within the transition to net zero carbon, improving energy security and affordability and for defence.
Impact of the Autumn Statement
The Autumn Statement presented by Jeremy Hunt, Chancellor, on 17 November largely undid much of the tax-cutting mini-budget of his predecessor that caused market chaos, instead focusing on stabilising the economy and saving £5 billion, divided between tax rises and spending cuts.
Less than 10% of our survey respondents said that the Autumn Statement fully restored confidence, but 77% said that it improved the situation to an extent.
The markets moved only slightly following the chancellor’s speech: the FTSE 100 rose 0.1% and the FTSE 250 increased by 0.3%. Many measures were announced in advance to avoid further market turmoil.
The rating agency, Moody’s, said that the planned tax increases and spending cuts went some way to counter the September issues. However, it highlighted that the “polarised domestic political environment and heightened policy unpredictability may undermine efforts to deliver on fiscal consolidation, particularly in the light of strong social and political pressures on government spending.”
With committed investment for HS2, Sizewell C and Northern Powerhouse rail, only 3% of our survey respondents said that the Autumn Statement was worse for construction than expected.
Before the announcement, there had been rumours of re-evaluation and cutting of major projects to tackle the deficit. However, pledges included more than £600 billion of capital spending over the next five years for schemes including HS2, Northern Powerhouse Rail, East West Rail and the New Hospitals Programme. A figure of £6 billion was also announced for energy efficiency measures.
Significant pressures remain for departmental capital spending, which will be “maintained in cash terms until 2027/28”. Due to the considerable inflation seen in recent times, there will be pressure across public sector and council’s infrastructure as budgets do not stretch as far and less is achieved. There is also concern about how this may influence procurement behaviours i.e., a return to a greater focus on cost.
The New Civil Engineer revealed that the release of the 2022 National Infrastructure Construction Pipeline (NICP) was delayed by the Autumn Statement and still needs to be released. Nick Smallwood, chief executive of the Infrastructure and Projects Authority, told a House of Lords Built Environment Committee meeting in January 2023 that inflation pressures are impacting pipeline. He said, “Recognising the huge challenges of inflation, the departments and government are now looking at where they have to make some choices. [Some projects] we have had to pause and stop and prioritise others.”
Global economy
The World Bank reported that a global recession is “perilously close” this year, echoing the International Monetary Fund’s World Economic Outlook, published in October 2022, which warned that 2023 would see “the weakest growth profile since 2001” aside from the global financial crisis and the peak of the COVID-19 pandemic.
In 2022, Russia’s invasion of Ukraine led to spikes in energy and food prices, causing high inflation in many countries. These issues reignited the cost escalation seen as countries emerged from the COVID-19 pandemic.
Slowing of the three largest economies — the United States of America (USA), EU and China is forecast. Although with the relaxing of China’s zero-COVID policy and improvements to energy pricing, there is hope of improved fortunes. Even so, caution surrounds opening up and the further threat of significant outbreaks.
Committee members from the U.S. Chamber of Commerce unanimously agreed in December that there would be a mild but short recession for the USA during the middle of 2023. Rising interest rates are likely to reduce consumer and business spending, particularly as savings built up during the COVID-19 pandemic are depleting, affecting consumer’s ability to keep pace with inflation. On 1 February 2023 the Federal Reserve raised its benchmark interest rate by a quarter of a percentage point — its eighth consecutive hike to try and subdue inflation.
Russia’s invasion of Ukraine has heavily impacted Europe’s economy due to the reliance on Russian energy. According to the European Commission, Russia supplied the EU with approximately 45% of gas, 27% of Brent crude oil and 46% of hard coal imports in 2021.
This high level of imports left the EU exposed to soaring energy costs. Eurostat data shows that annual inflation in the Euro area reached a record high of 10.6% in October 2022, with energy the highest of the main inflation components at 41.5%.
Predictions of an EU recession were widespread at the end of last year. However, there are hopes that the improving inflation and energy positions will mean that the European Central Bank (ECB) will less aggressively raise interest rates.
On 2 February, the ECB raised interest rates by 0.5% and intends to raise them by the same amount again in March. However, it will monitor data to inform decisions thereafter. Latest Eurostat data indicates a third month of falling inflation in the Euro area, but the January estimate shows an annual rate of inflation of 8.5% — which is still much higher than the target level.
Despite overall weakening, forecasters see some bright spots in the global economy for 2023.
Growth is anticipated for many Latin American countries as raw materials prices have increased.
The outlook is also favourable for Asia. Morgan Stanley’s ‘2023 Global Macro Outlook’ indicates an “optimistic outlook” for the region, forecasting growth for three of the world’s largest economies: China, Japan and India.
For more information on the global economic outlook and the forecast for the global construction industry in 2023, please refer to our report: Global Construction Outlook 2023: Can we fortune tell in a time of uncertainty?
Threat of reduced government investment
Data from the ONS indicates that initial estimates show that the public sector borrowed £27.4 billion in December 2022 — £16.7 billion more than in December 2021 and £21.1 billion more than December 2019 (pre-COVID-19).
The £27.4 billion figure for public sector net borrowing, excluding public sector banks, is the highest December figure since monthly records began in January 1993. High borrowing is a consequence of the sharp increase in spending on energy support schemes and debt interest.
Higher inflation has impacted the interest payable on index-linked gilts, rising in line with the Retail Prices Index.
In December 2022, the interest payable on central government debt was £17.3 billion – this is the largest December interest payable on record and the second largest in any single month behind the £20 billion recorded in June 2022. Of the £17.3 billion, nearly 80% (£13.7 billion) reflects the impact of inflation on the index-linked gilt stock.
Grant Fitzner, chief economist at the ONS, told the BBC that the cost of the energy support bill had added around £7 billion to the December borrowing figures and that without this and the impact of inflation, “underlying public sector borrowing would have been lower than a year ago.”
However, other commentators are concerned that the figures highlight further pressures from the weakening economy.
Climate emergency
The 27th session of the Conference of the Parties of the United Nations Framework Convention on Climate Change (COP 27) was held in November 2022 in Sharm el-Sheikh, Egypt.
Progress was made; agreement was reached for a pooled fund for countries severely affected by climate change — a move considered the most important advance since the Paris Agreement at COP 2015.
However, there was concern around final text wording of fossil fuels and the peaking of emissions. A provision was made to boost ‘low-emissions energy’ which could be open to interpretation and potentially used to justify the use of gas, which has lower emissions than fuel but is still a fossil fuel.
A commitment to phase down coal use was made at COP 26 in Glasgow. Some parties hoped that the text would be strengthened for a commitment to all fossil fuels. However, after negotiations, the text remained the same as previously.
Also omitted was a resolution for greenhouse gas emissions to peak by 2025, threatening the 1.5C target.
The BBC reported that the government approved plans for a new coal mine in Cumbria in December 2022 to provide fuel for steelmaking. It is the first new deep coal mine for 30 years.
Supporters say it will create much-needed jobs, but others argue it undermines the UK’s climate change targets. Half of coal used by UK steelmakers comes from Russia, but the UK pledged to stop using Russian resources. To meet greenhouses gas emission reduction targets, the steel industry must stop burning coal by 2035 or use emissions capture technology.
In approving the mine, Michael Gove, Communities Secretary, said that the coal mine would “to some extent, support the transition to a low-carbon future.”
Dr Sugandha Srivastav, from University of Oxford, said the new mine's approval would be viewed as "extremely hypocritical."
Nearly 70% of our survey respondents said that they are concerned that economic pressures will negatively impact sustainability targets. Many comments outlined disparity between available budgets and costs received leading to reduced sustainability targets.
Others said that if coal is used to supply steel to manufacture UK-based renewables technology, it would be a short-term sacrifice for long-term security and sustainability.
Some recognised that positive changes are being further supported by the need to reduce reliance on Russian imports. The IEA’s ‘World Energy Outlook’, published in October 2022, had some notes of hope that the energy crisis triggered by Russia’s invasion of Ukraine is leading to changes that can speed up the transition to a more secure and sustainable energy system.
The same report also found that policies from the EU, and countries such as Japan, USA and Korea, will likely see clean energy investments of approximately $2 trillion by 2030.
There is hope for progress but concern about timescales and the overall roadmap.
