2023 – a year in construction

From stagflation to greedflation, inflation remained a much-discussed topic throughout the year – in all its various forms – with ‘greedflation’ even shortlisted for Collins Dictionary’s word of the year. And as the year draws to a close and we look to 2024, we may well ask – is it time to accept inflation with resignation? However, there are still reasons to be cheerful. At the beginning of the year, we forecast that some sectors of the construction industry would struggle to steer the course through an unprecedented mix of economic headwinds. But the industry has remained resilient, in the face of falling demand and not all of the things we feared would happen a year ago have materialised. Here, we look back on a year that started with uncertainty but ends with confidence in the robustness of the industry.

An industry in need of leadership and transformative policies

At the beginning of the year, stagflation looked like a real possibility as the effects of widespread industrial action, spiralling energy costs and rampant inflation were felt throughout the UK. To add to the uncertainty there were few measures announced in the Spring Budget to inspire trust or hope in government policies to get the economy moving.

The announcement that five construction occupations would be placed on the Shortage Occupation List (SOL) were a beacon of hope in a budget that otherwise lacked industrial strategy to encourage construction investment and stimulate economic growth. And indeed, there’s little proof, as yet, that the SOL has made any difference to construction’s dwindling workforce, exacerbated by the 46,000 workers that The Centre for European Reform estimates we’ve lost through the end of the free movement of labour. We need policies that prioritise a long-term strategy with investment in apprenticeships and training.

As we’d anticipated, the postponement of capital investment programmes – that included parts of HS2 and Lower Thames Crossing – pushed up the price of these projects over the long-term, due to budgets being eroded by inflation. This resulted in the somewhat inevitable cancelling of the northern leg of HS2 in October. In our response to the cancellation, we said that it reveals: ‘a truly damning indictment of the UK’s ability to successfully plan and deliver long-term primary infrastructure’,  perhaps irrevocably damaging investor confidence in the country.

By the end of the year, the Autumn Statement was also notable for the continued absence of the publication of the National Infrastructure and Construction Pipeline. This has now been delayed even further, to early next year, despite not being updated since 2021.

In October this year, we called for more government transparency to better support the industry, after The National Infrastructure Commission made several recommendations in its second National Infrastructure Assessment. ‘The Commission states the case for the government to be transparent with the public about the costs of infrastructure projects, not just because their money is being spent, but because it can aid understanding of what investment in infrastructure means and where the long-term gains lie. In order to achieve this, we also advocated the sharing of data ‘to learn from previous projects, and to use that data to help inform future cost estimates.’

No recession but high interest rates lead to housing downturn

Despite the lack of government leadership and policies that favour capital investment, the UK economy hasn’t fallen into recession. ONS figures estimate that GDP has actually increased in Quarter 3 2023 by 0.6%, with an increase in construction output of 0.1%. However, although we’ve avoided recession for now, we’re forecasting new work output to fall by just over 1% in 2023.

The general rate of inflation, as measured by CPI, has fallen slightly further than our forecast of 6.6%, to 6.1% (down from 12.8% last year). And although the base rate has been kept the same since August, it remains high at 5.25%. The knock-on effect on interest rates has contributed to the significantly slowed demand across the industry, with EY Parthenon reporting in their profit warnings (3^rd Quarter) that rising interest rates are taking over as ‘the main driver of warnings’ with ‘credit-related warnings hitting their highest level since 2008.’ The high costs of borrowing have led to a slowing in demand that’s hit the housing sector particularly hard, with a slump not seen since the global financial crisis.

The latest ONS output data shows new private housing work was down 2.8% in the third quarter of 2023, compared to the second quarter, and 13.4% down on the third quarter of 2022. We expect worse next year, before the sector returns to growth in 2025. The government remains well off its target of 300,000 homes a year and in August we published our ideas on what measures could be taken to address the housing crisis.

Labour – cost driver of the year

Materials cost inflation has continued to ease throughout the year – annual growth in the BCIS Materials Cost Index went into negative territory in 3Q2023, at – 1.0% compared with 3Q2022. But, as we forecast at the beginning of this year, with wage awards needing to match inflation and with chronic shortages of both skilled and unskilled labour – exacerbated by the prevalence of an aging construction workforce – labour has replaced materials prices as the biggest cost driver.

However, as the year draws to a close, the slowdown in demand has led to a trend of stalling wage growth, with labour shortages masked by a reduction in activity.  A new report from Turner & Townsend has also suggested that the cancellation of the second leg of HS2 could create ‘opportunities for other projects to draw on released supply chain capacity’ within infrastructure and real estate, a potential boost to UK construction as a whole. This could potentially lead to a decrease in tender price inflation too.

RAAC attack

Although new housing output has fallen, retrofit and repair and maintenance (R&M) work continues to keep the industry buoyant. The Reinforced Autoclaved Aerated Concrete (RAAC) crisis highlighted the ever-growing gaps (literally) in funding for our public buildings, symptomatic of a lack of planned R&M programmes, over the decades. With more cases confirmed in schools and hospitals across the UK, we reported back in October that costs to replace a flat roof and refurbish rooms on a four-storey hospital could cost up to £2,000,000. However, R&M output could be impacted by the government’s decision to roll back requirements for all rental properties to meet a minimum EPC rating of C by 2028 – with reportedly four in ten private landlords cancelling plans to decarbonise their properties.

Retrofit made the headlines

Throughout the year several green campaigners and industry bodies criticised the government for their continued lack of any definite commitment to a retrofit strategy – which failed to surface in either the Spring Budget or Autumn Statement.

This is why Michael Gove’s landmark decision to reject Westminster Council’s approved plans to demolish M&S’ flagship store on Oxford Street came as something of a surprise. It made national headlines in July and was met with both consternation and acclaim across the industry. In November, the High Court granted permission for M&S to appeal Gove’s decision, so it remains to be seen what the impact could be on the industry.

However, in January, Greater London Authority (GLA) outlined a range of climate mitigation policies within its London Plan for developers to follow, encouraging a ‘retrofit first’ policy. It’s possible that planning departments will adopt this approach across the country but, as we’ve highlighted throughout the year, we need to ensure we have a skilled workforce to achieve this.

Specialist firms are potentially at more risk

As we anticipated at the beginning of the year, we’ve begun to hear anecdotal evidence that the capacity to deliver contracts has been affected by the high rise in insolvencies this year – in the year to September 2023, the total number of construction firms becoming insolvent was 4,287. This was an increase of 8.3% on the 3,958 insolvencies recorded in the year to September 2022. Specialist firms within the industry, such as Mechanical and Engineering (M&E), remain particularly vulnerable, as without the means to diversify in other areas they’re at greater risk. This is an emerging trend that we need to monitor in 2024, as it could impact the delivery of projects into the year.

Geopolitical forces continued to keep energy prices high

The UK economy and construction industry remained vulnerable to geopolitical forces with energy prices remaining high throughout the year. This was further exacerbated by the conflict in the Middle East towards the end of the year, which continues to disrupt shipping, oil and gas supplies. The upswing in oil prices is also fuelled by further global oil production cuts and a reduction in refining capacity.

However, French nuclear availability improved this year, with less risk seen for the winter supply. As the UK is interconnected with France, UK power prices are affected by French power prices. Additionally, there has been good renewable generation this summer which has helped to reduce prices.

There were still concerns regarding National Grid’s capacity to keep pace with increased electricity requirements, due to an increase in renewable energy suppliers and increased demand due to business and household decarbonisation.

The industry united to lower carbon emissions in the built environment

As the COP28 summit draws to a close and green leaders lambast delegates for not showing enough commitment to phasing out fossil fuels it’s clear our global leaders aren’t aligned over what the world should do to lower global carbon emissions. Therefore, there’s never been a more important time for our industry to take the lead. However, that’s not always been easy, as the industry lacks the tools and a reliable dataset to lower carbon emissions.

In October, we launched the Built Environment Carbon Database (BECD) with many other leading industry organisations, to solve this problem. It’s the first data repository of its kind to facilitate consistent whole-life carbon estimating and benchmarking. The success of this collaborative initiative has shown how much commitment there is on the part of the industry to report. And indeed, our own recent survey of industry professionals also revealed that the majority (64%) believe whole-life carbon assessments should either already be mandatory for all UK construction projects or be made mandatory within 12 months.

Conclusion

The lack of any evident government leadership coupled with the intensifying of significant economic pressures has made 2023 another extremely challenging year for construction. And as the number of insolvencies continues to rise, it remains to be seen how much this will affect construction output next year, especially if there are projects that rely on specialist services to be delivered. However, the fears that overshadowed us at the beginning of this year have dissipated to some extent. We’ve not gone into recession and we’re forecasting overall output in 2023 to be in the positive territory. Clearly, 2024 won’t be without its challenges but construction has proved to be a resilient industry and will no doubt benefit from the boost of an upcoming election.