UK Construction Market Report 3Q 2023
Other factors
Economic outlook
According to ONS data, monthly GDP is estimated to have grown by 0.5% in the month to June, following an unrevised fall of 0.1% in May 2023. Better than forecast, this brings monthly GDP to 0.8% above its pre-COVID-19 level (in February 2020).
Quarterly GDP in 2Q 2023 remains 0.2% below the level set in 4Q 2019 (pre-COVID-19); Reuters highlights this makes the UK “the only big advanced economy yet to regain its pre-COVID, late-2019 level”.
The figures suggest some resilience as the UK continues to avoid a technical recession. Still, James Smith, research director at the Resolution Foundation, points out, “The big picture is that the UK economy has expanded by just 0.7% since the start of 2022 — the weakest growth in 65 years outside of a full-blown recession”.
There are concerns that conditions will worsen going forward as higher interest rates take effect and the fight against persistent inflation continues.
Threat of reduced government investment
Public sector net borrowing, excluding public sector banks, in June 2023 was £18.5 billion — the third-highest June borrowing since monthly records began in 1993, but £0.4 billion less than in June 2022 due to higher tax receipts and a substantial fall in debt interest payable. However, additional inflation-related costs and the rising cost of living, including energy support schemes, offset the improvements.
Although the interest payable on central government debt was significantly less than a year earlier (£12.5 billion, £7.5 billion less than June 2022), the ONS release highlights that it was still the third-highest payable in any single month on record behind June and December 2022.
With inflation remaining elevated, pressure remains on interest payable on debt and there is concern that this will impact government spending elsewhere. The BBC highlighted that during the last financial year, the government spent £111 billion on debt interest — more than it spent on education. The Office for Budget Responsibility (OBR) says debt could rise to more than 300% of GDP by 2070.
Government influence on construction output
According to ONS data, monthly construction output is estimated to have increased by 1.6% in volume terms in June 2023, with increases in both new work (2.0%) and repair and maintenance (1.1%).
Six of the nine sectors saw a rise in June, with the main contributors to the increase noted as infrastructure new work and non-housing repair and maintenance, increasing by 4.7% and 3.4%, respectively.
For 2Q 2023, quarterly construction output increased by 0.3% compared to the first quarter. The increase came solely from June 2023, with repair and maintenance increasing by 0.9% and new working decreasing by 0.1%.
Whilst viability issues and the significant cost escalation of recent times particularly impact new build, an uptick is likely in repair and maintenance undertaken to extend the life of assets.
Total construction new orders decreased by 7.1% in 2Q 2023 compared to 1Q 2023, mainly coming from public other new orders and infrastructure new orders, which fell by 32.9% and 26.5%, respectively.
Barbour ABI, construction data supplier to the ONS, said that the reduction in new orders could be attributed to the cost of living crisis and the related slowdown in the wider economy causing uncertainty, along with a slowing in the award of government contracts for rail and road projects.
Over three-quarters of our survey respondents said that some schemes are stalling due to uncertainty and continuing challenges of cost escalation and viability issues are hampering the construction industry's growth.
This result echoes wider industry data. The latest RICS 2Q 2023: UK Construction Monitor found that survey respondents ranked ‘financial constraints’ as the top issue limiting industry activity, with credit conditions considered to have deteriorated over the past three months by the majority of respondents.
Survey respondents to the S&P Global/CIPS UK Construction PMI for July “widely noted that higher interest rates and the uncertain UK economic outlook had constrained order books.” However, the month also saw the renewed expansion of overall construction output and a marginal rise in total new work.
The government has committed to large work programmes, such as the New Hospital Programme, the School Rebuilding Programme and Great British Nuclear. There are also ongoing infrastructure projects, such as HS2 and Tideway. However, the pressures seen across the industry are evident amongst these.
An example of the mixed fortunes surrounding government-backed construction projects is the New Hospital Programme, which has seen the government commit over £20 billion to build 40 new hospitals by 2030.
Work is yet to commence on 33 schemes and in July, the National Audit Office said the government will likely miss its target. The watchdog also said the definition of “new” was broad, as the programme includes the refurbishment of existing buildings as well as new hospitals.
Rising costs in the current inflationary environment pose risks to delivery, with the Institute for Financial Studies senior research economist, Ben Zaranko, reporting to the BBC, "Either the government sticks to that pledge and accepts it will need to spend more on hospital building, or it decides it scales back the number and scope of hospitals".
The School Rebuilding Programme is also behind schedule. Construction News recently reported that as of March 2023, there had been just 24 contract awards against a target of 83, with the National Audit Office highlighting the delay to programme forecasts was largely a result of the supply chain declining contracts due to inflation risks and market volatility.
Internal government estimates calculate a £366 million impact from the decision by ministers earlier in the year to delay the construction of the Birmingham to Crewe section of HS2, phase 2a, by two years. The National Audit Office warned after the announcement that the delay would “lead to additional costs” due to consequences such as the need to manage sites for longer and the impact of supply chains being stood down and reengaged.
The vast majority of respondents to our survey, 96%, said that rising mortgage rates and rental activity will somewhat or significantly impact the construction of new homes. For eight consecutive months to July 2023, lower residential activity was reported by the S&P Global/CIPS UK Construction PMI.
With aggressive increases in interest rates pushing up mortgage rates and elevated inflation levels squeezing personal budgets, higher numbers are turning to the rental market.
Widespread criticism and claims that Michael Gove has “given up on housing” followed news of the Department for Levelling Up, Housing and Communities handing £1.9 billion of its funding back to the Treasury, blaming soaring interest rates and post-COVID uncertainty for the unspent amount.
Significant proportions of the unspent cash were intended for key housing issues, such as £255 million for affordable housing and £245 million for building safety improvements.
Thinking about an upcoming election and how a new government could improve the industry, respondents ranked the top three areas for focus as addressing labour shortages and shrinking the skills gap, incentivising land purchases and development and refining payment practices.
But with over 60% of contractor respondents to our survey saying the industry has little to no influence on the government’s decision making and fewer than one in five respondents having confidence in the government ultimately increasing construction output, the onus is for construction to take the initiative in navigating headwinds and taking advantage of tailwinds.
Despite the massive commitments made to government capital spending programmes, there is concern about future delivery, meeting net zero carbon commitments and the already strained construction industry, particularly in terms of labour and skills. An open dialogue and better transparency surrounding pipelines could ease recruitment caution in supply chains and lead to better-informed decisions — making the industry less reactive.
Overall, the industry has the opportunity to fill the vacuum and collaborate on a range of issues. This should help improve best practices across key themes covered in this report, such as digitalisation and decarbonisation.
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