UK Construction Market Report 4Q 2024
Political and economic context
Key statistics:
Autumn Budget
of respondents think the Autumn Budget is neither good or bad for the construction industry.
Project delivery
of those who took our survey were not confident or not at all confident that pledges such as building 1.5 million homes will be delivered in the planned timescales.
Investment in UK property
of respondents think the Autumn Budget will encourage less investment in the UK property market.
Gross domestic product (GDP)
According to ONS data, monthly GDP is estimated to have fallen by 0.1% in September 2024.
Estimates suggest that GDP grew by just 0.1% in the three months to September 2024 — coming in below the economist consensus forecast of 0.2% growth and lower than the 0.5% growth during the second quarter.
A 1.2% quarterly rise in business investment is a positive in the data, which has now grown for four quarters. However, businesses warn that higher taxes announced in the Budget, such as employer National Insurance contributions, will hit private sector investment and hiring next year.
The Office for Budget Responsibility (OBR) expects the economy to grow by just over 1% this year, rising to 2% in 2025. This reflects increased spending plans in the Budget, giving the economy a short-term boost.
According to the Centre for Economics and Business Research, the prospect of a 20% levy on US imports would cut the UK’s economic output by 0.9% by the end of Donald Trump’s presidency. The US is the UK’s second-largest trading partner after the EU.
Public sector net borrowing
Public sector net borrowing, excluding public sector banks, was £17.4 billion in October 2024 — £1.6 billion more than that borrowed in October 2023.
The figure surpasses forecasts and marks the second-highest October borrowing since monthly records began in January 1993. Economists had predicted £13.3 billion of borrowing for October.
ONS data shows the fiscal challenge facing the Treasury in delivering growth while reducing debt. Spending on public services, benefits and debt interest costs were all up on last year, with expenditure rising faster than revenue overall despite total receipts rising.
Interest payments on government debt reached £9.1 billion — the highest October figure since monthly records began in 1997. Public debt, excluding state ownership in banks, was up 1.6% on last year at an estimated 97.5% of GDP.
Meanwhile, borrowing in the financial year to October 2024 reached £96.6 billion, which is £1.1 billion more year-on-year.
Central government departmental spending on goods and services rose by £2.5 billion to reach £36.9 billion in October, driven by “pay rises and inflation-related cost increases.”
This figure reflects the effects of pay deals that exceeded inflation, introduced after the Labour government assumed power, resulting in backdated pay increases for NHS staff and teachers starting from October.
The Budget is projected to boost government spending by nearly £70 billion annually over the next five years, as reported by the OBR. Higher taxes will party fund the increase, such as employer National Insurance contributions, with increased borrowing funding the rest.
According to a survey by the ONS, the proportion of businesses saying taxation is their main concern has risen to 14% — up from 10% the previous month.
The pressure on public finances looks set to remain unless the chancellor receives unexpectedly positive news on growth and, therefore, tax revenues in future. Until then, tax rises set out in the Budget will likely remain in place for the foreseeable future.
Meanwhile, the process of allocating funding between different government departments has been delayed from spring to June 2025.
Phase 2 of the spending review will set out plans for at least three years of day-to-day spending and set capital budgets for five years. The absence of a multiyear spending review extends a period of uncertainty for ministers and their departments.
The delay likely reflects the Chancellor's difficult choices and trade-offs in backing different public service areas amid the strain on public finances and meeting fiscal rules.
Construction activity and output
According to ONS figures, monthly construction output is estimated to have grown by 0.1% in volume terms in September 2024. This follows revised upward growth of 0.6% in monthly construction output in August 2024.
At the sector level, four out of the nine sectors grew in September 2024, with the main contributor to the monthly increase being private housing repair and maintenance, which grew by 1.3%.
On a quarterly basis, construction output is estimated to have increased by 0.8% in the three months to September 2024 compared to the second quarter (April to June) of 2024. The increase — the first after three periods of consecutive falls — came solely from an increase in new work (2.0%), as repair and maintenance fell by 0.6%.
The data shows new order figures struggling during the quarter, reaching £9,673 million — the lowest level since 4Q 2023. This mainly derived from a fall in private commercial new orders, which fell by 20.8% (£786 million), caused by decreases in the office, entertainment and retail sectors.
Most respondents (51%) said the Autumn Budget was neither good nor bad for the construction industry.
Supporting comments point to mixed sentiments highlighting the funding to stimulate the housing and infrastructure sectors, but amid higher taxes, such as the rise in employer National Insurance contributions, potentially tempering growth and positivity.
Just over a quarter (28%) deemed the Budget bad for the industry. Higher taxes will concern contractors and SMEs where margins are often already delicately poised. As profit margins narrow, developers may be deterred from pursuing certain projects.
Some respondents said costs would likely be passed through the supply chain — adding pressure to already stretched budgets, potential redundancies and a lack of employment opportunities exacerbating skills shortages.
At 41%, a slight majority of respondents said the Budget will make no difference to investment levels in the UK property market.
While a £1 billion investment was pledged to remove dangerous cladding next year, the chancellor did not say how and if social landlords can access the funding, with more details in due course.
Indeed, some respondents expressed scepticism about funding allocations based on previous iterations taking too long to reach where needed or falling behind inflationary increases — falling short of the required sums.
Others among the 38% who said less investment will follow cited the increase in stamp duty, leading some to refrain from purchasing second properties and finding other investments with their capital.
Interest rates are still viewed as a major obstacle to investment levels. Despite the Bank of England reducing rates to their lowest level in more than a year at 4.75% in November 2024, development financing and project viability remain under pressure.
With the increase in borrowing and public spending in the Budget, the OBR forecasts inflation to stay above the 2% target in 2025 and higher than expected for the next four years, meaning that interest rates will fall more slowly and not as far as previously thought.
For the 21% that said more investment will be encouraged, the extra support for housing, such as the Affordable Homes Programme and local government projects, could yield increases in private sector investment to collaborate with the public sector in delivering capital projects.
Nearly nine in ten respondents (88%) said they were either unconfident or not confident at all that government pledges would be delivered on time.
Housebuilding and planning reform featured heavily in Labour’s election pledges and the King’s Speech, where an ambitious target of building 1.5 million new homes over this parliament was set.
Implementing planning reform and local plan amendments, as set out in the consultation on revising the National Planning Policy Framework and the new Planning and Infrastructure Bill, will be key to unlocking more sites for housing and infrastructure in the long term.
However, the announcement regarding funding to recruit 300 new planning apprentices is unlikely to significantly address national staff shortages, nor will it offset the potential loss of nearly 30% of officers who may leave or retire in the next two years.
Respondents pointed to previous government targets on housing and large infrastructure projects rarely being delivered. Factors such as high interest rates, building costs, procurement inefficiencies and skills shortages impacting project viability all cast doubt on developers building the required number of homes or infrastructure.
Additionally, Development Consent Order (DCO) challenges have become increasingly common in recent years.
A report commissioned by the previous government published in October 2024 revealed that since 2010, 30 sought to overturn the secretary of state’s grant of a DCO with only four challenges being successful.
As well as resulting in “downstream” delays to construction work on major projects, National Highways calculated that the increase in costs attributable to legal challenges was between £66 million and £121 million per scheme.
Just over two-thirds (69%) of respondents said a combination of reasons contributes to cost overruns, with a lack of clear strategic direction being the most cited single reason at 14%.
Supporting comments point to a cause-and-effect scenario whereby scope changes, inertia or delayed decision-making lead to costly labour increases and materials uplift due to inflation.
Addressing these root causes is vital for improving cost management and ensuring successful project delivery.
Some divergence emerges on how best to manage uncontrolled costs — a common occurrence on larger infrastructure projects leading to the auditing of costs, which could be negated in the first place through correct commercial management.
Views ranged from commercial teams being too thin on the ground to deal with the scale of costs to consultants providing inflated staff, resulting in increased spending for less value.
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