NuGen Properties

Construction recession set to be deeper than feared

Latest forecasts from the Construction Products Association (CPA) show mounting fears for the health of the industry.

Six months ago, when Boris Johnson was still prime minister, the CPA was forecasting a 0.4% fall in construction output in 2023. After that Truss/Kwarsi budget, the forecast was downgraded to a 3.9% fall. Now the CPA is saying UK construction output will shrink 4.7%.

In context, however, things are not as bad as they have been in the recent past. CPA economics director Noble Francis said: “The construction industry has enjoyed a buoyant two years since the first national lockdown largely shuttered the industry back in Spring 2020 and activity still remains high for the moment. Overall, however, construction output is forecast to fall by 4.7% this year. It is worth keeping in mind the broader context that this is not 2008 and the decline is nowhere near the fall in output that occurred in the last recession. Looking back 15 years ago, construction output fell by 15.3% over two years during the global financial crisis.”

The CPA’s Construction Industry Forecasts 2023-2024 (Winter 2022/23 Edition) predicts that output will recover slowly in 2024 with growth of 0.6%.

Private housing new build, the largest construction sector, and private housing repair, maintenance & improvement (RMI), the third largest sector, are forecast by the CPA  to be the worst affected sectors this year. Falls in activity in these areas are expected to be partially offset by continued growth in infrastructure, the second largest sector, which is already at historic high levels of activity. Even here, however, there are growing concerns over the impacts of double-digit construction cost inflation. Given financial constraints for government, this means that we are likely to see the value of activity expected previously but not the volume, the CPA said.

Private housing is forecast to be the sector most affected by the downturn and fortunes for the sector over the next 12-18 months are likely to go one of two ways, according to the CPA. The main forecast anticipates a soft landing for the housing market, which involves a sharp decline in demand during 2022 Q4 and 2023 Q1 before a recovery in demand this spring. Even then, private housing output in 2023 is forecast to experience an 11.0% fall as house-builders focus on completing existing developments rather than starting new sites. This fall is primarily attributed to rising mortgage rates, falling real wages and poor consumer confidence. Plus, there is now a less friendly government policy environment for house-builders, given the end of Help to Buy, the Residential Property Developer Tax and the Building Safety Levy. The largest impact of the decline in demand is likely to be on property transactions, which are anticipated to fall in 2023 by around 20% while house prices are anticipated to fall by 8% -10%. After two consecutive years of double-digit growth, house prices will return to levels seen around a year ago. However, if demand doesn’t recover from spring as mortgage rates continue to fall, private housing could fall even further, the CPA says.

Private housing RMI output was driven to historic high levels in 2021 due to increased working from home and a ‘race for space’. With falling real wages, poor consumer confidence and double-digit construction cost inflation, many homeowners were quick to start delaying smaller, discretionary improvements work and output has been falling since March 2022. Larger improvements work, however, continued last year as households had pencilled in the finance for it at the start of 2022, according to CPA analysis.

Given further expected falls in real wages and increases in mortgage payments for many households this year, a further decline in private housing RMI output of 9.0% is forecast in 2023. This will focus on a fall in larger improvements activity, before slow growth of 1.0% in 2024 as activity recovers in line with the wider UK economy. Unsurprisingly, however, one area of private housing RMI that continues to remain strong is energy-efficiency retrofit; given homeowner concerns over energy prices, insulation and solar panel installations activity is currently buoyant.

Infrastructure continues to go from strength to strength, reaching historic high levels in 2022 as it benefitted from multi-billion pound projects such as HS2, the Thames Tideway Tunnel and Hinkley Point C as well as long-term frameworks activity in sub-sectors such as rail, roads and energy. Further growth in infrastructure output is expected but it is likely to be slower than in previous years due to cost inflation and financial constraints. The chancellor’s 2022 autumn statement protected capital spending plans but gave no extra money to cover for build cost inflation.  The CPA foresees some public sector projects coming unstuck over rising costs. In addition, financially constrained councils are likely to cut spending on new projects to cover the rising costs of essential repairs and maintenance. In the medium-term, projects towards the end of the government’s spending review are expected to be pushed back into the next review period due to budgetary constraints. After 4.9% growth in 2022, infrastructure output is forecast to rise by 2.4% in 2023 and 2.5% in 2024.

CPA economics director Noble Francis said: “Private housing and private housing RMI, two of the three largest construction sectors, are highly dependent on the wider UK economy, interest rates, real wages and consumer confidence. So, as the UK economy falls into recession, interest rates rise, real wages fall and consumer confidence remains poor, construction output will fall sharply in these sectors. These falls will be partially offset by continued growth in infrastructure but that means that it is more important than ever that government maintains its commitments to meeting its own targets by investing in levelling up, its infrastructure pipeline and transitioning to net zero.”

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