Construction slows down as costs rise and demand falls

Recent reports have painted a bleak picture for the construction industry as economic conditions raise costs and negatively affect demand for new projects.

According to the Construction Products Association, construction output is forecast to fall by 3.9% this year. Market analysis, forecasting and company intelligence firm Glenigan has predicted a 2% fall in most types of project starts. 

This is a hangover from the impact of a wider economic recession exacerbated by the effect of the ‘mini budget’ and other political uncertainty in the last quarter of 2022. Last summer, Glenigan was predicting 8% growth for this year.

The Royal Institution of Chartered Surveyors (RICS) disclosed that there has been a slowdown in all construction activity. Just 8% of surveyors asked in a recent poll by the RICS expected overall workloads to increase in the next 12 months – down from 27% in a poll conducted only three months earlier.

Supply issues

Added to this gloomy picture, there is no easing of supply-side problems in sight. Figures from the Department for Business, Energy and Industrial Strategy show that the typical price of a basket of construction products has risen in line with increases in the cost of commodities, including bricks and lumber (both up 1%).

Other products predicted by consultancy Linesight UK to see price hikes include ready-mixed concrete, thermal or acoustic insulating materials, metal doors and windows, and a 1.5% increased cost for bricks.

Michael Riordan, Linesight UK managing director, said: “Given the complexity of the market environment and economic uncertainty, we are collaborating closely with clients and advising of the importance of relationship-based supply-chain management, as well as an elevated level of value engineering, to deliver cost and programme certainty.”

Glenigan forecasts a 2% drop in the value of what it calls underlying starts this year – this excludes projects worth more than £100m.

Glenigan’s economics director, Allan Wilen, said: “There are opportunities about, but companies will have to be fleet of foot, as the best projects may not be in their usual sectors or regions. From 2024, we are hopeful that the economy will be in a better place and the industry will be strengthening.”

Private residential project starts are forecast to drop 5% this year, as lower household incomes, higher mortgage rates and a lack of affordable homes continue to squeeze the market.

However, infrastructure remains buoyant with 1% growth anticipated in new work getting under way, on top of the impact of ongoing major projects such as HS2, which falls outside the scope of the forecasts.

Levelling up

According to Glenigan, investment will continue to migrate from London to the regions, with starts in the capital down by 4% this year, while Scotland, Wales and the North West will all see an increase in new work. This trend is being driven by the government’s levelling-up agenda, according to Wilen.

Simon Rubinsohn, RICS chief economist, said: “The deteriorating macro environment is taking a toll on the industry, with access to credit now being cited as a key challenge for businesses alongside the more familiar issues around materials and labour. The RICS metric capturing the extent of skill shortages has barely budged in recent quarters, with a range of trades in particular short supply.

“Meanwhile, the impact of the shift in the economic outlook is most visible in the residential and commercial sectors, where workloads are now viewed as likely to flatline over the coming year. Ongoing commitments to a number of big projects are, however, continuing to support activity in the infrastructure area.”