Intro
Construction has largely ridden out a wave of eye-watering inflation and cost increases, but experts predict another difficult year ahead with a recession, continued inflation, unpredictable materials costs and labour shortages.
The construction industry turned out a relatively decent performance in 2022 when measured against the wider national backdrop of inflationary pressures, high borrowing costs and several dire economic forecasts from the Bank of England.
According to analysis of data published by the Office for National Statistics, the industry’s output hit £205bn, up 15% on 2021, with the second quarter the busiest quarter ever recorded.
But choppy waters are ahead as industry analysis points to an even more challenging 2023. A looming recession in the UK - GDP is expected to fall by 1.2% this year - will be accompanied by continued high, albeit slowing, inflation and high interest rates. Construction is also still prey to shifts in global forces, most notably the war in Ukraine and its effect on energy prices.
Falling output
The bleak economic picture for the UK - the only G7 economy forecast to shrink in 2023 - led economists at the Construction Products Association (CPA) to sharply downgrade their forecasts for construction output in 2023.
In statistics released in February it predicted a drop in activity of nearly 5% this year, a major downward revision from -0.4% it forecast just last summer and -3.9% forecast in the autumn.
The CPA said two of the three largest sectors of activity - private housing, new build and housing repair, maintenance and improvement - are due to be worst affected. However, historic high levels of activity in infrastructure will partially offset falls in these areas.
A less pessimistic outlook on construction activity came from Experian’s construction forecasting unit. Its economists predicted a 1.7% dip in construction activity in 2023 before a return to modest growth in 2024.
Experian said although newbuild work will bear the brunt of the downturn this year, a backlog of new orders for prisons, defence and some hospital work should help the non-residential sector achieve modest year-on-year growth of between 1.5% and 2% in 2023 and 2024.
Build costs stabilising
Builders were hit hard by the high cost of materials and components in 2022 as prices, on average, rose by a quarter year-on-year, according to the latest figures from the Government.
The Building Materials and Components Statistics, from the Department for Business, Energy and Industrial Strategy, reveal that average annual building materials prices were up by 25% in 2022, from 2021, and some 54.4% higher than in 2015.
As inflation comes back under control indications are this trend may be slowing. Material costs fell by 1.3% month-on-month between November and December, according to the Government stats, down 5.9% from July, when prices peaked. This chimes with findings in a report by the Builders Merchants Federation, which said price inflation had largely stabilised in January with some suppliers deferring price increases as demand slows.
Nevertheless, manufacturers remain under significant pressure from rising labour costs and energy prices, especially for energy-intensive products and materials like glass, steel, and concrete. This makes a comprehensive re-set of material prices unlikely this year and the industry remains largely at the mercy of volatility in the energy markets.
Wage inflation
Labour shortages and the cost of living crisis fuelled a gradual rise in wages for skilled construction trades in 2022, with weekly earnings breaking through the £1,000 barrier in December, according to figures from the biggest payroll in the industry.
Hudson Contract said that average pay packet in its payroll was £945 per week, up 4.5% against 2021, while a 1% rise in December saw the average wage tip over the £1,000 threshold.
Though rising, salaries in construction are behind in real terms when viewed against national inflation. A survey from civil and structural engineering consultant Pick Everard in February found that two-thirds of companies it polled had awarded pay rises lower than the headline 9% annual rate of inflation. No firms were giving above inflation pay increases, it said, although 17% were giving ‘roughly the same’ as inflation.
The ongoing skills shortage was viewed as particularly challenging by respondents to the latest RICS UK Construction Monitor for Q4, 2022. Over 50% reported difficulties hiring quantity surveyors and other construction professionals, including project managers and a “broadly similar” percentage pointed to problems sourcing bricklayers, electricians, and plumbers.
Perhaps unsurprisingly then, 17% said they are planning to increase spending on workforce development and training in 2023, although that figure was down from a recent high of 37%.
Tender inflation
The elevated costs for materials and labour may pose a risk to construction programmes during procurement and construction, but tender prices are still predicted to rise throughout 2023.
Construction cost consultant Turner & Townsend forecast in February that real estate tender price inflation (TPI) will settle to 3.5% in 2023 before falling to 2.5% through 2024. Infrastructure TPI will run higher, it said, at 5.5% during 2023, dropping to 5% in 2024, partly driven by major public sector projects like HS2.
However, in a note of caution it said the UK economy is edging closer to recession and there is uncertainty in contractors’ pipelines. It also underlined the CPA’s prediction that activity may fall by as much as 4.7% in 2023 and said the sector should target investment in innovation and productivity to help build short-term to long-term resilience.
Alongside these concerning projections there are also reasons to remain positive. A recent survey by the British Property Federation of boardroom directors found that almost half plan to accelerate the delivery of their net-zero programmes this year. A further 28% said they expect to maintain investment at its current level and just 2% said they expect to scale back delivery.
And with construction’s anticipated slowdown starting from a relative highpoint at the end of 2022, it may take a while for the sector to experience the impact of the wider economic downturn. We might see a shallow, albeit prolonged dip, rather than a catastrophic shock to the system.
