Construction output is forecast to fall by 3.9% in 2023 following a rise of
2.0% in 2022, as activity currently continues at a high level.
The fall for 2023 is a sharp downward revision from -0.4% in the Lower
Scenario of the CPA’s Summer Forecasts. This is mainly due to the impact of a
wider economic recession, exacerbated by the effect of the ‘Mini Budget’, and
the consequent fallout from recent political uncertainty.
There are still many factors which will adversely affect the construction
forecast such as falls in real wages and potential further rises in interest
rates, which will likely lead to further falls in consumer spending decisions.
On top of these issues, the wider uncertainty around the UK economy means
that demand for private housing new build and private housing repair,
maintenance, and improvement (rm&i) is expected to fall. Other key
construction sectors such as commercial and infrastructure are also expected to
be affected by increasing concerns over construction cost inflation, which are
likely to hinder project viability.
With an annual turnover of £37 billion, private housing is the largest
sector in the construction industry. Activity is currently strong with most
major house builders sold through to 2023 Q1. However, after the ‘Mini Budget’
announced in October 2022 and the resulting financial market chaos, interest
rates are expected to peak at 4%. Activity was already expected to slow due to
rising interest rates to 3% but the announcement worsened this forecast. The
repercussions of this on mortgage rates will dampen potential demand and house
prices for new homeowners. Furthermore, after more than a decade of low
mortgage rates, some existing homeowners will be faced with the pressure of
increased mortgage repayments and some may be forced sellers, adding further
pressure to the housing market. As a result, property transactions and prices
are likely to fall over the next year, with house builders likely to reduce
house building targets. After growth of 3.0% in 2022, private housing output is
now forecast to fall by 9.0% in 2023 before returning to 1.0% growth in 2024.
Following a record level of £24 billion last year, private housing rm&i
output, the third largest construction sector, has been decreasing since March
2022. With a drop in real wages and sharp increases in mortgage payments for
many households, there is likely to be a further fall in smaller, discretionary
improvements and renovation spending. Output in this sector is expected to
decline by 4.0% in 2022 and 9.0% in 2023, before marginal growth of 1.0% in
2024.
Commercial output is forecast to remain flat in 2022 before a fall of 5.1%
in 2023. This comes as buoyant fit-out and refurbishment activity is offset by
a hiatus in major new office and mixed-use tower projects, which dominate the
sector. Commercial towers are reliant on large, up-front investment for a
long-term rate of return. There are currently major projects in the pipeline
over the next 12 months that were signed up to last year. With accelerating
costs and worsening economic prospects, however, it raises the question of
whether those projects will break ground in the near-term or whether they will
be paused and pushed back into 2024 or, potentially even cancelled.
Infrastructure, the second largest construction sector, should be the least
affected by issues of household finances and rising interest rates.
Nonetheless, it is not immune to the impacts of both sharp cost rises and
government making clear that it will not increase departmental budgets to deal
with rising costs. Therefore, we are likely to see the value of activity that
we expected previously but not the volume. In the medium-term, projects towards
the end of the government’s Spending Review will get pushed back into the next
review. Councils, which are already financially constrained, are also expected
to cut spending on new infrastructure projects and divert finance to cover the
rising costs of basic repairs and maintenance. Overall, after 5.2% growth in
2022, infrastructure output is forecast to rise by 1.6% in 2023 and 2.6% in
2024. This will be driven by larger projects already underway such as HS2,
Hinkley Point C and Thames Tideway despite the cost overruns and delays.
Overall, given that construction output is expected to fall significantly
over the next 12 months, it is critical that new government is focused on
delivering its targets including 300,000 net additional homes per year,
levelling up, and bringing forward infrastructure activity. Additionally, as
part of its movement towards Net Zero, the UK must prioritise the
energy-efficiency of its new and existing homes.
Professor Noble Francis: “With the UK economy expected to fall into
recession, the construction industry will also fall into a recession. It is
worth keeping in mind that activity in the industry currently remains at a
historically high level, but it will not be immune to the effects of falling
real wages and spending at the same time as the cost of construction continues
to rise at double-digit rates.
“The largest effects will unsurprisingly be on private housing and private
housing rm&i, given that they are reliant on households’ willingness and
ability to spend. Activity in both sectors will fall significantly, albeit from
a high point. Major clients’ willingness to invest in new commercial developments
will also be tested given concern over the UK economy and rising construction
costs. Furthermore, infrastructure will be adversely affected by central
government and local authority spending constraints as well as increased
pressure for austerity despite continual government announcements and
reannouncements of more and more infrastructure.”
