Karl Horton, Chief Data Officer at BCIS
THE OUTLOOK for construction seemed bleak back in January 2023 but, while GDP is now only 1.7% higher than pre-COVID levels, widely held expectations of recession have not come to pass at the end of the year.
The volatility of materials prices, which characterised 2022, has cooled, with labour becoming the new cost driver on projects. Wage awards have brought inflation-matching increases to trades, while skills shortages have been reported across the industry.
Overall output, though, has held, albeit being buoyed by repair and maintenance work – new work will be down for the year, and is expected to decrease again in 2024.
As the last few years have proved yet again, construction is incredibly vulnerable to external forces – shifting government policy, geopolitical developments, and the industry’s ongoing recovery from the pandemic will play no less a part in its required resilience in 2024 as it has this year.
Outlook for Construction 2024
We’re forecasting new work output for 2023 to be down by just over 1%, and BCIS foresee a bigger decrease next year.
The beleaguered private housing sector has fared worst this year, down 9.7% in the first nine months of the year on the preceding three quarters.
But overall contraction in the sector for 2023, forecast at -8.3%, is not as large a decrease as had been expected. This means a bigger fall is now forecast to come next year, before the sector returns to growth in 2025.
The Chancellor’s Autumn Statement contained measures intended to provide a boost to housebuilding, in the shape of promised streamlining of planning processes and funding for schemes for tens of thousands of new homes, but they’ll do little to lower house buyers’ borrowing costs in the short-term. Mortgage affordability remains the fundamental hurdle.
Infrastructure has shown positive growth in 2023, up 6.3% in 1Q 2023 – 3Q 2023 on the last three quarters of 2022. We’re forecasting a 4.6% increase overall for 2023, but New Orders data from the Office for National Statistics is concerning.
Comparing this year so far with the last three quarters of 2022, new orders for infrastructure (primarily compiled from planning applications submitted to local authorities) were down 31.6%.
The cancellation of the Manchester leg of HS2 dominated headlines in early October, but the impact of inflation on budgets has seen many projects cut back or delayed, including a two-year delay to the Lower Thames Crossing. We expect infrastructure new work output to decrease slightly next year, before returning to growth in 2025, and we continue to call for the government to prioritise a consistent, clear, and committed approach to the projects pipeline.
Infrastructure planning was conspicuous in its absence from the Autumn Statement, though on the same day the Department for Levelling Up, Housing & Communities set out its next steps with measures due by spring and summer 2024.
There was a flurry of activity around reinforced autoclaved aerated concrete (RAAC) at the beginning of the school year, generating many headlines around the prospect of school and hospital roofs falling in on their occupants, though not entirely without warning since the issue had been reported and was being monitored in many settings prior to the media frenzy.
Indeed, existing spending programmes for hospitals and schools, as well as prisons, will help support continued growth in the public non-housing sector in 2024, though the recently discovered RAAC problems may require funding to be diverted in the short-term.
With maintenance budgets in the public sector already under pressure, the RAAC situation has proved exactly why investment in ongoing maintenance work – to keep buildings operational and their users safe – is so crucial.
While the volatility of materials costs dominated 2022, much cooler prices have become the norm in 2023, with the BCIS Materials Cost Index entering negative territory in 3Q 2023, with -1.0% annual growth, and predicted to fall further. Considering where we were last year, annual comparisons are expected to continue showing decline into 2024.
According to the BCIS Private Housing Construction Price Index, house builders’ costs are expected to rise by 1.4% in the year to 4Q 2023. Although this is significantly down on the peak annual inflation of 15.3% reported in 2Q 2022 it is still likely eroding the development margins on current schemes. In 3Q 2023, quarterly growth was negative for the first time since 2009, at -0.3% compared with 2Q 2023.
This year, therefore, we saw labour become the main cost driver on projects, though nothing as dramatic as the soaring materials cost inflation we witnessed, particularly in 2Q 2022.
We’re forecasting annual growth in the BCIS Labour Cost Index to be 6.9% in 4Q 2023. Wage awards implemented in the summer and agreed for 2024 and 2025 have been inflation-matching, and so the pace of increased labour costs is expected to slow from next year onwards.
With reduced output in the industry perhaps masking the full effects of shortages at the moment, there have been widely reported issues with sourcing skilled labour, including by the BCIS TPI Panel. Earlier this year, CITB published its estimate of 224,900 extra workers (44,980 a year) needed to meet construction demand between now and 2027.
Annual growth in tender prices followed a downward trend in 2023, with the BCIS All-In TPI falling from 8.6% in 1Q 2023 to 3.5% in 4Q 2023 on the same periods in 2022 respectively.
Our TPI Panel, made up of cost consultants from firms involved in multiple tenders across the UK, has reported contractors are still sensitive to project risk profiles, and still selective about what they will tender for.
Having said that, we have been tracking contractors’ appetite to tender and saw an increased eagerness in 4Q 2023, with 60% of panel members reporting contractors being more and very eager to tender in comparison to the previous quarter, reflecting the overall contraction in demand in the sector.
Two-thirds of panel members also noted that their pipeline of projects for the next 12 months had reduced, further reflecting a general slowdown.
We expect annual movement in tender prices to continue to ease, reaching 2.1% at the end of 2024.
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