Home » What does ‘normal’ mean now for the construction industry?

What does ‘normal’ mean now for the construction industry?

Published: 18/01/2024

A stagnating economy with high borrowing costs, low consumer demand and shaken investor confidence were among the hallmarks of 2023. Going into an election year, our Chief Economist Dr David Crosthwaite considers the outlook for the construction industry and asks: Is this the new normal? 

Ease of access to finance, and the impact of borrowing costs on investors’ appetite and consumer demand, will continue to underpin how construction activity fares in 2024. 

It now seems to be a question of when, not if, the Bank of England will lower borrowing rates, and crucially by how much. While we’re not in a full-blown recession, we’re teetering on the brink with very low growth, which is not a good look for the current government in an election year. No doubt some pressure will be applied to the BoE now that inflation is under control. 

An election year of course adds a layer of uncertainty to the mix, and not just because Rishi Sunak hasn’t narrowed the date down any further than stating the general election will fall in the ‘second half of this year’. The Spring Budget will be one of, if not the last, fiscal events with which the government can influence public opinion before heading to the polls, but then an election campaign, whenever it comes, will be disruptive to key decisions. 

Beyond the election, whoever ends up in power, there will be a period of transition. Spending plans will inevitably stall as pledges are enacted and action plans set out. 

The industry, and the infrastructure sector particularly, is crying out for some clarity around and commitment to a planned pipeline of work, both to boost investor confidence, and to ensure the necessary resources are in place on the supply side. The last thing it needs now is yet more uncertainty.

And it’s not just an important political year on the domestic front. The Economist has estimated that half the world’s population, some four billion people in 76 countries, have elections in 2024. It’s being described as the biggest election year in history. 

BCIS’s five-year forecasts, which cover construction, civil engineering and maintenance, cleaning and energy output and costs, are underpinned by a set of assumptions, some of the most potentially significant of which relate to conflicts and geopolitical developments. 

From energy prices and access to raw materials and import costs to labour supply, the last few years have served as a stark reminder of just how vulnerable the industry and its supply chain is to external forces. This week we’re hearing about the knock-on effects of disrupted shipping routes in the Red Sea, but recently it has felt like those reminders come on an almost daily basis. 

So it is a fast-moving picture, and it can feel like we’re lurching from crisis to crisis. But are we going to be stuck in this heightened state all year, or are things finally going to calm down? 

The Inflationary impact on construction resources has certainly cooled. After peaking in summer 2022, growth in the BCIS Materials Cost Index steadily declined throughout 2023 and, in our most recent provisional figures, has gone into negative territory. But borrowing costs remain high. The Bank of England’s Monetary Policy Committee meets again at the beginning of February, when it will consider moving the base rate from 5.25%, otherwise unaltered since August. 

The cost of borrowing directly impacts on investment levels in construction, so no surprises that new work output has been falling. Although repair and maintenance work has been the buoyant force in construction, it too has been affected by the cost of living crisis. 

Indeed, persistent low growth has become characteristic of construction, as it has the wider economy, and it is highly likely that the industry is actually currently in a recession. With the lag in official data, we will discover if that is true in a few months’ time.

Are there any seeds of hope? 

A recent flurry of activity around reduced mortgage rates is hopefully the beginning of a trend that we will see play out over the next few months. Big housebuilders, as both client and contractor, tend to have the ability to adjust to demand levels fairly well, and they have needed to as the hardest-hit sector. 

FTSE 250 housebuilder Crest Nicholson issued a warning to shareholders this week, setting out its expected 2023 profit levels at 70% less than in 2022. But the firm cited shifting mortgage rates as contributing to a ‘more constructive backdrop’ for 2024 and said there has been an increase in customer inquiries. 

Despite constraints in public spending, ongoing hospitals, schools and prison programmes should sustain public non-housing work this year, on top of and including dealing with newly identified RAAC remediation work. 

Details around infrastructure planning from government haven’t exactly been flowing freely of late. We’re yet to see the very delayed update to the National Infrastructure and Construction Pipeline, with the government promising a National Infrastructure Strategy this year, and so we really need the government to prioritise infrastructure investment as what it is – a key lever of economic growth. 

Changing environmental and working requirements taking effect in the next year may also boost activity, especially in major refurbishment projects. 

Across most sectors, expected output is best described as fairly flat in the short term but, given where we have come from over the last 12 months, it’s an outlook that seems much more benign. As ever, the construction industry has a knack of adapting to its environment. When demand picks up again, we’ll have a new set of problems to deal with, like how to urgently plug the labour supply gaps and skills shortages being reported across multiple sectors. 

Of course, while we don’t expect to see any more dramatic declines based on what we know and what experience tells us, none of us can claim to foresee what surprises 2024, the year of elections, might yet throw our way.

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