UK Construction Market Report 4Q 2023
Other factors
Key statistics:
Economic outlook
growth in gross domestic product (GDP) since its lowest point in April 2020, during the COVID pandemic.
General election
of survey respondents think Labour is most likely to win the next general election.
Construction output
increase in monthly construction output since its lowest point in April 2020, during the COVID pandemic.
Economic outlook
According to ONS data, monthly GDP is estimated to have grown by 0.2% in the month to August, following a revised fall of 0.6% in July 2023 — the largest month-on-month contraction since June 2022.
On a monthly basis, GDP is now 2.1% larger than before the COVID-19 pandemic, reflecting a flat to modest growth trajectory.
However, the British Chambers of Commerce has warned the UK economy "remains in a precarious position", citing ongoing challenges such as high inflation, interest rates and skills shortages.
Public sector net borrowing
Public sector net borrowing, excluding public sector banks, in September 2023 was £14.3 billion — £1.6 billion less than in September 2022 and the sixth-highest September borrowing since monthly records began in 1993.
Data from the ONS shows that interest on government debt in September was £0.7 billion, a significant drop of £7.2 billion compared with the same month in 2022.
The interest payable on central government debt is the third lowest since monthly records began in 1997, reflecting that on around a quarter of its outstanding debt, the government pays interest linked to the old-fashioned Retail Prices Index measure of inflation, which has dropped sharply over the past year.
Government borrowing is close to £20 billion lower for the first six months of the financial year than the forecast made by the Office for Budget Responsibility (OBR) in the March budget.
However, The Guardian reported that experts play down the potential for pre-election tax cuts or higher spending as any such movement would make it harder to achieve debt-cutting targets in the future.
Interest rates are significantly higher than forecast by the OBR in March and soaring debt interest costs will make debt reduction harder to achieve.
The Guardian also reported that the yield, or interest rate, on UK 30-year government debt reached the highest level in 25 years in October, with the yield on the benchmark 30-year gilt hitting 5.115% on 4 October amid a wider sell-off in government bonds.
Pressures on construction activity and output
According to ONS data, monthly construction output is estimated to have decreased by 0.5% in volume terms in August 2023; this follows an upwardly revised decrease of 0.4% in July 2023.
Conversely, despite the monthly decrease, construction output saw an increase of 0.9% in the three months to August 2023; this came from 0.9% increases in both new work and repair and maintenance.
Five of the nine sectors saw a fall in August 2023, with the main contributors to the monthly decrease seen in private commercial and private new housing, which decreased 4.1% and 1.4%, respectively.
Like last quarter, 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.
Rising costs have led the government to reevaluate previous commitments. The HS2 high-speed rail link between Birmingham and Manchester was scrapped in early October, with “totally out of control” costs blamed.
The government extended some of the UK’s net zero deadlines in September, with Rishi Sunak saying he was putting “the long-term interests of our country before the short-term political needs of the moment". Supporters agree that the planned policies would have hit households too hard financially, given the cost of living crisis. On the contrary, critics say that taking longer to reach net zero will damage the UK economy and could cost jobs and push up energy bills in the long run.
The S&P Global/CIPS UK Construction PMI for September also demonstrates the struggles experienced. Total industry activity decreased for the first time in three months at the fastest rate since May 2020. The downturn was primarily due to residential work stalling, with the latest fall in housing activity being the steepest since April 2009, as high mortgage rates and low demand filter through to supply chains.
Infrastructure economics
The National Infrastructure Commission (NIC) recently published its second National Infrastructure Assessment with a series of recommendations, not least of all concerning major public transport upgrades in England’s most congested cities, to unlock economic growth.
Following the government’s recent decision not to go ahead with the Birmingham to Manchester section of HS2, a void has formed around where local authorities based their economic growth plans. Whether the reallocated funding to other schemes helps improve connectivity and capacity in the North and Midlands remains to be seen.
Empiric research shows that improved transport connectivity can generally be expected to lead to an increase in GDP. It is imperative, therefore, that the distribution of infrastructure improvements is nationwide.
Lessons will undoubtedly need to be taken from the failure to deliver the northern sections of HS2 to ensure better management of future projects from design to supply chain contracting. Otherwise, there is a twin risk of hesitancy from future governments in committing to infrastructure spending and decreased confidence in the UK’s ability to attract inward investment to help deliver projects on budget and on time.
Net zero-sum games
Recent announcements from the government concerning the costs of achieving net zero and the need to postpone or, indeed, scale back previous pledges will be of concern to the industry.
The Climate Change Committee, an independent organisation set up to advise the UK on how it can meet its climate commitments, states that the UK is falling behind.
The decision to push back the 2030 ban on new fossil-fuel-powered cars to 2035 and exempt some households with gas boilers complicates efforts to reach net zero by 2050.
Investment in clean energy jobs across the UK and production from carmakers will be lost in the short term, possibly indefinitely, as they look elsewhere to invest in electric vehicle production.
However, it is the change of policy on decarbonising our buildings that is singled out as the biggest risk to meeting Net Zero 2050 targets.
The exemption of 20% of households – still to be defined – from the gas boiler phase-out can only have a negative impact on emissions up to 2050. Another scrapped deadline is the requirement for newly-let rental properties to achieve an Energy Performance Certificate (EPC) of at least C by 2028 instead of 2025.
Construction, among other sectors, requires a consistent set of policies to work within and plan for as a minimum if retrofitting projects are to be successfully delivered.
Major changes to plans to meet the net zero target include:
- A five-year delay in the ban on the sale of new petrol and diesel cars. The requirement for all new vehicles to be “zero emission” will not be enforced until 2035
- A nine-year delay in the ban on new fossil fuel heating for off-gas-grid homes to 2035
- A 50% increase in the Boiler Upgrade Grant to £7,500 to help households replace their gas boilers
- Poorer households will be exempt from the ban on the sale of new gas boilers in 2035
- The scrapping of the requirement for landlords to ensure rental properties have an EPC of grade C or higher from 2025.
General election
Most respondents expect the Labour Party to win the next general election — mirroring the latest Ipsos polling where Labour has a 20-point lead, up from 17 in July, with the Party on 44%.
In contrast to the previous question, the Conservatives come out on top in respondents deeming them the most supportive of construction and real estate and the Party who would inspire confidence for investment.
It is worth noting, however, that the survey was conducted prior to the Labour Party conference, where commitments were made, such as strengthening Section 106 agreements and the creation of new towns.
The majority thought that an election was most likely to occur in 12 months. It will, therefore, be interesting to monitor the position and see whether views change as time rolls on.
Although cost escalation slows projects and purdah will restrict pre-election activity, some departments are actively pushing ahead with projects to keep momentum and to achieve the required need.
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