UK Construction Market Report 2Q 2023
Other factors
Economic outlook
Forecasts for the UK economy have improved significantly, although weakening is still predicted.
As part of the spring budget, the OBR predicted that the UK economy would avoid a technical recession in 2023 (defined as two consecutive quarters of decline) but will shrink by 0.2% this year — an improved forecast to its November estimate of 1.4% reduction.
The OBR also indicated growth forecasts of 1.8% next year, followed by 2.5% in 2025 and 2.1% in 2026.
Following a 0.4% rise (revised) in January 2023, ONS data shows an estimate of no growth in February 2023. An increase in construction offset falls in services and production. Monthly GDP is now estimated to be 0.3% above its pre-COVID-19 level (February 2020).
The services sector fell by 0.1% in February, after growth of 0.7% (revised) in January 2023. The fall in service output is primarily attributed to the impact of industrial strike action by teachers and parts of the civil service. Production output fell by 0.2% and manufacturing was flat.
Construction grew by 2.4% in February after falling by 1.7% in January 2023. February 2023 had the highest monthly value in level terms at £15,558 million since records began in January 2010. Increases in the month were seen in both repair and maintenance (4.5%) and new work (1.1%), with eight of nine sectors increasing.
Feedback from the Monthly Business Survey for Construction and Allied Trades suggested several reasons for the rise. Continued strength across the repair and maintenance sectors along with a bounce back from the fall in the previous month, drove the increase. Many firms also noted improved weather in February 2023, facilitating improved output.
Over 80% of respondents to our survey said that the forecasts of negative growth and “stagflation” impact investment opportunities.
The increased cost of capital, closely related to interest rates and, therefore, inflation, has hit values and returns along with cost escalation leading some investors to delay activity.
Improved economic forecasts and results seem to be growing confidence. S&P Global CIPS UK Construction PMI data for March, published in April, revealed that 46% of its survey panel predict an increase in business activity in the year ahead, with only 11% foreseeing a reduction.
The resulting index reading signalled the strongest business sentiment since February 2022. Optimism has rebounded strongly from the 2.5-year low seen in December thanks to a turnaround in client spending and a favourable outlook for the UK economy.
Only 33% of survey respondents thought that the upcoming coronation of King Charles III will act as a catalyst for improved confidence in the economy. Although there will be a boost to tourism and the feel-good factor of the celebration, Queen Elizabeth II’s Jubilee celebrations impacted GDP figures due to the reduction in number of working days, as did the additional bank holiday for the subsequent funeral of the Queen.
Impact of the spring budget on the construction industry
Launched on 15 March, the spring budget included numerous measures which will impact the construction industry.
Industry reaction to the Budget has generally been mixed, with some welcoming the investment announced and measures to help increase the number of workers. However, some are sceptical of delivery, given previous progress.
The missed opportunity to promote and support retrofit has also attracted criticism, given the scale of the challenge.
Roughly half of respondents to our survey thought that measures such as apprenticeships for the over 50s and increased early years childcare provision would help overcome construction’s labour and skills shortages.
Just under 60% (57%) said that investment announcements in the spring budget help to increase confidence in construction industry pipeline, helping to give certainty.
However, 43% of respondents expressed concern that there is uncertainty about what will actually be delivered and when; whether programmes will come forward in the planned timescales, if they will be slow to progress and could there be the scaling back of projects due to inflationary challenges on budgets.
Before the spring budget, the government announced that HS2 would be delayed by a further two years due to the impact of soaring inflation and budget pressures. Effects include rephasing parts of the line between Birmingham, Crewe and Manchester and more delays to plans to run the trains into the central London terminus at Euston.
Many have expressed concern that the overall cost will only likely increase and the extended timescales will delay the benefits, threatening net zero carbon targets and the economy.
Threat of reduced government investment
Data from the ONS shows that public sector net borrowing in February 2023 was £16.7 billion, which was £9.7 billion more than February 2022 and the highest February borrowing since monthly records began in 1993 — primarily due to substantial spending on energy support schemes.
The release also shows that the debt-to-GDP ratio has reached levels last seen in the early 1960s at circa 99.2% of GDP.
The OBR’s latest economic and fiscal outlook, March 2023, shows a brighter position than its previous update in November 2022. The budget deficit and public debt see lower forecasts, although only part of the costs of the energy crisis are reversed, which are felt on top of larger costs from the COVID-19 pandemic.
According to the OBR’s calculations, the chancellor spent two-thirds of the fiscal outlook improvement in the spring budget measures, providing more support with energy bills and business investment in the short term while boosting labour supply in the medium term. This helps to lower inflation for this year and sustainability raises employment and output in the medium term, but in five years, debt will only fall by the narrowest of margins.
