FIS Publish Latest State of Trade Survey

FIS Publish Latest State of Trade Survey

According the the latest FIS State of Trade Survey, the finishes and interiors finished 2022 relatively strongly with a net balance of 42% experienced growth in sales (against 17% in Q3) and 50% of those responding to the FIS State of Trade Survey reporting sales volumes increasing by over 5% (up from 33% reporting the same in Q3).

Looking ahead to 2023, again the picture for sales is more positive than in Q3 with those predicting growth swinging from just 20% to 75%.  There is, however, an acceptance that some projects will slip and not all will turn into boots on the ground and the overall impact on anticipated workload is that there is a slight downward trend with just 33% predicting growth (versus 45% in Q3).

The majority anticipate static market conditions for the year ahead, with a small swing in terms of those predicting a decline (up to 26% from 25% last quarter) resulting  in a net balance predicting growth of 9%.   This is slightly less optimistic than in Q4 2021 when a net balance of 18% were predicting an increase in workloads.

You can read the full findings, including an update on inflation and investment in the FIS State of Trade Survey Q4 2022 here.

CPA forecasts recession in construction for 2023

CPA forecasts recession in construction for 2023

The construction industry is expected to endure a recession this year after two strong years for the industry. According to the Construction Products Association’s Winter Forecasts, construction output is expected to fall by 4.7% in 2023 before recovering slowly in 2024 with growth of just 0.6%.

The construction industry is not immune to the impacts of a wider UK economic recession, rising interest rates and inflation. Private housing new build, the largest construction sector, and private housing repair, maintenance, and improvement (rm&i), the third largest sector, are forecast 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.

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. 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 still, private housing output in 2023 is forecast to experience an 11.0% fall as housebuilders focus on completing existing developments rather than starting new sites. This fall is primarily due to rising mortgage rates, falling real wages and poor consumer confidence. Plus, there is now a less friendly government policy environment for housebuilders, 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% whilst house prices are anticipated to decline 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, as is outlined in the CPA’s Lower Scenario.

Private housing rm&i 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. Given further expected falls in real wages and increases in mortgage payments for many households this year, a further decline in private housing rm&i 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 rm&i 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. Going forward, 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 stated clearly in the Autumn Statement that capital expenditure would be maintained in cash terms. In the near-term, this is likely to mean that current central government projects go overbudget given double-digit construction cost inflation. Also, there will be hesitancy from the public sector signing up to new projects due to uncertainty over costs spiralling further. 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: “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.”

“Private housing and private housing rm&i, 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.”

CPA response to the Chancellors Autumn Statement 2022

CPA response to the Chancellors Autumn Statement 2022

Chancellor Jeremy Hunt highlighted ‘stability, growth and public services’ as the three main priorities of his Autumn Statement 2022. For construction product manufacturers, as well as the wider construction industry, the announcements made under the ‘growth’ priority will perhaps be most pertinent.

While the Chancellor announced that the UK economy is now in recession, his aim was to regain credibility following the previous Chancellor’s ‘Mini-Budget’ – to calm markets, tackle inflation, and bring down interest rates through a mixture of tax increases and longer-term public spending cuts. His fiscal position will be crucial to our overall economic outlook, but the big announcements that are likely to directly impact construction looking ahead fell under his announcements for ‘Energy, Infrastructure and Innovation’.

Key announcements include:

  • New funding for a further £6.6bn for retrofitting buildings starting from 2025, aimed at reducing energy consumption from buildings and industry by 15% by 2030
  • Launch of a new Energy Efficiency Taskforce
  • A commitment to local infrastructure projects by matching Round One levels of funding in Round Two of the Levelling Up Fund
  • A commitment to key national infrastructure projects including HS2 to Manchester, Northern Powerhouse Rail and East-West Rail as well as gigabit broadband rollout, and a feasibility study of A75 to go ahead with no cuts from capital budgets for the next two years
  • Proceeding with a new nuclear power plant at Sizewell C, subject to final approvals
  • The stamp duty cut announced in the previous Mini Budget won’t be indefinite and will end on 31 March 2025

Commenting on the Autumn Statement, CPA Economics Director Professor Noble Francis, said: “While the additional funding for energy efficiency from 2025 is welcome news, this funding is for further years after the current £6.6 billion finishes and clearly delivery in 2030 still signifies a longer-term goal for Government rather than a quick win. The detail of delivery for energy efficiency is crucial given previous flops in Government policy, and the CPA will closely follow further details as they emerge. Retrofitting our existing housing stock is crucial both for growth in the sector and to meet our net zero targets.

The commitment to infrastructure projects at both a local and national level will be welcome news to the industry, given some calls to reduce HS2 to Birmingham to help avoid tax increases. However, the announcement that funding for infrastructure would be “maintained in cash terms” in times of double-digit construction cost inflation means that we will see less activity down on the ground, particularly for financially constrained councils. Levelling Up through investment in infrastructure is a crucial way in which the construction industry can support wider economic growth, as well as its own, so it is vital that it is fully funded.

For housing, the stamp duty cut is likely to have only a marginal impact given the greater issue of interest rate rises and negative housing market sentiment. As a result, substantially more will be needed to stimulate both housebuilding over the coming years.”

Initial summary of the Autumn Statement and the OBR Economic Analysis

CPA - UK Economic and Construction Update

Workloads in the finishes and interiors sector hold up

Workloads in the finishes and interiors sector hold up

Whilst uncertainty has dominated headlines, workloads in the finishes and interiors sector held up well in the quarter.  The picture is more mixed when we look to sales, with the balance experiencing growth reducing from 29% to 17% (when comparing to the last survey period) and those experiencing a decline increasing from a fifth to a third of respondents.

Against a backdrop of uncertanty, looking ahead to 2023, those predicting growth in sales are in the minority (just a fifth of responses). Those seeing the market as static or declining are equally split leaving an overall balance of 20% anticipating a reduction in sales. Again the picture for workload is more optimistic with sales from 2022 washing through and a balance of 19% still anticipating growth.  Concerns were experessed about the sub-contractor squeeze as tender price increases do not fully reflect the significant increase in operating costs.

Uncertainty is casting doubt on the viability of some future projects with nervousness amongst investors linked to political and economic uncertainty. It is therefore not surprising to see demand move ahead of labour shortages as the biggest expected constraint for the marke, however, commentry still flags the “alarming lack of quality and reliable labour”.

The full FIS State of Trade Survey Q3 2022 can be downloaded here.

Construction output expected to fall significantly in 2023 amid looming UK economic recession

Construction output expected to fall significantly in 2023 amid looming UK economic recession

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.”

FIS members - download your copy

CPA response to the Chancellors Autumn Statement 2022

CPA provides economic update

The CPA has produced an economic update which details

  1. Insolvency Service UK Construction Insolvencies (August 2022)
  2. ONS/Land Registry UK House Price Index (August 2022)
  3. Bellway Preliminary Results (October 2022)
  4. Travis Perkins Trading Update (2022 Q3)

The CPA draft Autumn forecast figures will be available from Monday 24 October although the CPA will confirm the figures and publish the pdf document in November after the Chancellor’s Medium-term Fiscal Plan and Office for Budget Responsibility (OBR) analysis alongside it have been released as well as the impacts of these on the financial markets, given the currently uncertainty regarding the UK economy and volatility in the financial markets.