CPA provides economic update

CPA provides economic update

The CPA has produced an economic update which details: 

      1. ONS Construction Output (January 2023)
      2. S&P Global/CIPS UK Construction PMI (February 2022)
      3. RICS UK Residential Market Survey (February 2023)

    Market Data

    FIS has access to a wide range of market data from sources including the CPA and Barbour ABI. In addition, FIS produces a state of trade survey specifically for the finishes and interiors sector.

    CPA provides economic update

    CPA provides economic update

    The CPA has produced an economic update which details:

      1. ONS UK Construction Materials Price Indices (January 2023)
      2. ONS UK Construction Employment by Age-demographic (2022 Q4)
      3. Bank of England UK Mortgage Approvals (January 2023)
      4. BEIS UK Brick Sales (January 2023)
      5. Nationwide House Price Index (February 2022)
      6. Persimmon Full Year Results (March 2022)
      7. Taylor Wimpey Trading Update (March 2022)

      Market Data

      FIS has access to a wide range of market data from sources including the CPA and Barbour ABI. In addition, FIS produces a state of trade survey specifically for the finishes and interiors sector.

      Mixed performance for construction product manufacturing heading into 2023

      Mixed performance for construction product manufacturing heading into 2023

      The Construction Products Association’s latest State of Trade Survey for 2022 Q4 revealed a quarter of mixed fortunes for the construction product manufacturing industry. Performance was split between a decline in sales for heavy-side producers and continued growth for manufacturers on the light side. Furthermore, manufacturers expect these dynamics to persist in 2023, with new build starts affected by economic uncertainty but refurbishment and activity for energy-efficient retrofit continuing apace.

      In 2022 Q4, 20% of heavy-side manufacturers reported that sales of construction products declined, marking a second consecutive quarter of decline. In contrast, 27% of light-side manufacturers reported that product sales rose, which extended a run of growth to ten straight quarters.

      In the Q4 survey, demand was viewed as the key constraint on manufacturers’ activity going forward. On balance, one-third of heavy-side firms, whose products tend to feed into the earlier stages of construction, anticipated a decrease in sales over the next 12 months, with two-thirds citing demand as their key concern. On the light side, a balance of 8% of firms anticipated a rise in sales during 2023.

      Rebecca Larkin, CPA Head of Construction Research said: “It was a mixed bag for construction product manufacturers at the end of last year, with demand in some areas of construction knocked by renewed economic uncertainty following the Truss government’s Mini Budget, as well as early signs that historically high inflation was stalling household spending and business investment decisions. This primarily affected heavy side manufacturers, who experienced a fall in sales for products that are typically used at the earlier stages of construction as demand and confidence weakened for new build project starts. Sales growth continued for light side manufacturers in Q4, however, and is likely to have been buoyed by areas of construction that are still experiencing strong activity, namely offices refurbishments and energy-efficient retrofit such as insulation measures.”

      Key survey findings include:

      • A balance of 20% of heavy-side firms reported that construction products sales fell in Q4 compared with Q3, marking a second straight quarter of falling sales
      • 27% of light side firms reported product sales rose, the tenth quarter of growth
      • One-third of heavy-side manufacturers anticipated a decrease in sales over the next 12 months; 8% of light-side firms anticipated a rise in sales
      • Fuel, energy and raw materials costs rose for all heavy-side manufacturers
      • Overall costs are expected to increase over the next year according to balances of 69% on the heavy side and 62% on the light side, the lowest balances since mid-2020

      Overall, the Q4 survey highlights the varied demand by the construction sector and adds to the signs pointing to a slowdown in activity across new build or sectors that are driven by consumer or business confidence, which will be partially offset by high levels of activity on commercial refurbishment and energy efficiency improvements.

      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.

      FIS data is absorbed into the wider CPA State of Trade Survey – you can see the full results and findings 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 provides economic update

      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