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  • Writer's pictureKaren Fletcher

UK economic and construction performance - looking into 2024

Image showing researchers looking at figures on screen

The latest webinar from the Building Engineering Services Association (BESA) hosted Professor Noble Francis, Economics Director at the Construction Products Association (CPA). He provided insights and figures on the current state of the UK economy, the construction sector - and what me might expect in 2024.

As BESA’s Chief Executive, David Frise noted in his introduction, few of the CPA’s recent outlook reports have been ‘cheery’. However, as Professor Francis highlighted: “We try to be pragmatic, and at the moment, some areas of construction are looking quite good, while in others it’s extremely challenging.”

The CPA’s forecasts examine metrics from across 30 construction sectors and sub-sectors, so the analysis is both thorough and detailed. First, Professor Francis offered an overview of the UK economy in Autumn 2023. The main highlights were:

* The economy is ‘flatlining’. In Q2 2023, GDP rose by 0.2%, but CPA figures point to a slow-down in Q3.

* In the longer term, the better news is that while a recession is possible in 2024, it’s more likely that we will continue to see GDP ‘bounce around’ monthly with flatlining on a quarterly basis.

* Inflation looks set to be with us for at least the next 12 months. This is being held in place by rising oil prices (OPEC cut production twice during the summer of 2023) and the effect of strong wage rises.

* Earlier in 2023, the CPA had anticipated that interest rates would reach 5.75% at the end of 2023 and stay at that level for around six months. The Association also believed that in Q2 of 2024, interest rates would start to fall away. However, what seems to be more realistic is that interest rates have peaked now (October 2023) at 5.25%. However, because of that stubborn inflation, it seems likely that they will remain around that level for another year.

* Interestingly, despite tough times in the UK economy and with gloom pervading world news, consumer confidence has been rising since Autumn 2022. However, Professor Francis speculated that this may show an improvement compared to confidence levels during what he termed the “Truss/Kwarteng ‘ debacle” of their mini-budget.

And looking into 2024 the key points to note are:

* Next year, the combination of inflation and interest rates could create the conditions for slower growth of GDP. However, Professor Francis noted that: “GDP may continue to surprise on the upside despite the effects of rate rises.”

* Unemployment has started to rise in 2023, and this seems set to continue in 2024.

* We have not yet seen the impact of rising interest rates on mortgages. Around 1.6 million homeowners will be coming off fixed-interest loans in 2024. Rising costs seem likely to impact consumer confidence and spending.

Construction industry insights

In the Summer of 2023, construction output deteriorated with construction output volume falling by 0.4% in July and 0.5% in August. Professor Francis also said that the early indicators for construction activity in September (from the Office of National Statistics) show a further dip.

However, performance differs considerably across construction sectors. For example, with infrastructure, despite the news on the northern section of HS2, activity remains very buoyant. In August 2023, infrastructure activity was 30.4% higher than it was in January 2020.

The industrial sector (primarily warehouses and factories) is also performing well. At the start of 2023, industrial activity was at its highest-ever level. This was driven by warehouse developments driven by the long-term shift to online shopping.

Private housing as a sector has been falling since the spike in mortgage rates at the end of 2022. Professor Francis noted that: “Most of the major housebuilders are battening down the hatches and focusing on completions rather than starting new developments.”

This is understandable given that figures show demand for housing has fallen by around 20% to 30% since the peak of Summer 2022 (just before the mini-budget). In addition, rising mortgage rates are putting new homes out of the reach of first-time buyers.

In the commercial sector, ONS figures show that private commercial volume in August 2023 was 26% lower than it was pre-pandemic. However, Professor Francis highlighted that this overall figure skews into very different patterns for commercial sub-sectors.

In new commercial towers or large mixed-use developments, activity is around one-third lower than it was pre-pandemic. Historically, that accounts for most of the volume of commercial activity.

But while that part of the market has slowed considerably, some areas of commercial are currently very active – and have been for the last two to three years. These include commercial fit-out and refurbishment of existing commercial developments (particularly offices). Here, activity is higher than pre-pandemic numbers.

In addition, change-of-use in the commercial sector is another highly active area. This could be transforming existing commercial developments into residential, or for logistics. Biotech and data centres are also sectors showing strong activity.

ONS data on new orders shows that new orders volume in Q2 2023 was 10.6% lower than in 2019. However, Professor Francis sounded a warning note on these figures, pointing out that can be volatile and skewed by large orders such as HS2, for example.

The CPA’s forecasts for 2024 anticipate continued low activity. The two key predictions to note are:

* Final figures for 2023 are likely to show an overall 6.8% fall in construction output against the previous year. But this is weighted down by certain sectors, particularly private and public housing which will show falls of 19% and 15% respectively.

* In 2024, the CPA is anticipating an overall is a broadly flat construction output. Current figures anticipate a fall-off of around 9% in the industrial sector as large warehousing projects are completed. Although this figure looks high, the current impressive performance means that the sector is likely to remain active into 2024.

Professor Francis also highlighted several risks to the construction industry that are likely to be on the cards for 2024:

* Major housebuilders are likely to look for significant price cuts and discounts from the supply chain.

* Labour availability and cost will continue to hamper the industry, particularly in the skilled trades and specialist engineering sectors.

* Cost inflation is falling, although materials prices remain high. Unfortunately, rising oil prices may mean that these higher prices remain with us for some time.

* On the brighter side, materials supply should be smoother with the exception of semi-conductors.

* A general election looks likely in 2024 (although the latest official date could be January 2025). Professor Francis said that this may provide some stimulus – with housebuilders anticipating a return of a Help-to-buy scheme.

While the CPA’s analysis does not seem to bring a great deal of cheer to the Autumn of 2023, Professor Francis pointed out in his conclusions that: “Construction activity is still strong overall”. He also highlighted some key areas of opportunity:

* Major infrastructure projects and frameworks – although the extent of the HS2 line has been reduced, there are other major projects in the pipeline.

* Commercial refurbishment – continued work on upgrading buildings to meet new environmental performance standards continues. As the SectorScope has reported, office building owners are also aware that tenants are seeking out (and paying for) high-quality spaces. CPA figures also show that change of use from commercial to residential or logistics is also an important area of opportunity.

* Health infrastructure could also be a growth area when/if more of the New Hospital Programme (which is largely about upgrading existing buildings) comes through.

* Projects addressing the RAAC (concrete) issues at school buildings. Professor Noble noted, however, that this will not be additional budget for schools, so it will impact other school-based construction projects.

Perhaps the best takeaway from this excellent analysis by the CPA is that things could be worse and that, with some sectors showing continued growth, staying informed about upcoming projects and client requirements is going to be more important than ever.



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