In a recent webinar, economics expert Professor Noble Francis went behind the headline statistics to discuss the latest CPA Spring Economic Forecast in more detail. Here, we reveal what he believes lies ahead for the construction supply chain.
Construction output is set to contract by 6.4% during 2023, according to The Construction Products Association’s (CPA) Spring forecast, which was released on 2 May. Professor Noble Francis, CPA Economics Director, said this contraction will largely be due to a sharp fall in private new housing and RM&I, as well as delays to major infrastructure projects. Speaking during the CPA webinar, he first gave an overview of how output in the construction sector has changed over the last few months.
He said: “Overall construction output bounced back in February 2023 and remains above pre-pandemic levels in most key construction sectors, being 2.4% higher than it was in January. Though it’s important to note that January’s output was a 1.7% fall compared to December 2022, so part of February’s growth was because it bounced back from previous month’s fall. January’s figures were also negatively affected by high rainfall during the first two weeks of January, which delayed outdoor construction projects.
“The private housing RM&I, infrastructure and industrial sectors remain well above pre-pandemic levels. The same was true for private housing until November 2022, though that sector has fallen back since then.
“Commercial activity continues to remain very subdued, and in February was 27% lower than pre-pandemic levels. Firms working on fitouts, refurbishments and the conversion of commercial developments into other uses tell us that demand remains very strong and are also higher than before the pandemic, but the majority of the commercial market is based on new construction, and demand in that sector is lower than it was.”
A downgraded forecast
The CPA has downgraded its latest predictions for the construction industry in its Spring 2023 Forecast, and now expects to see a 6.4% contraction in output over the year.
Professor Francis said: “The main reason for that 6.4% drop is that we have significant falls in the two biggest sectors – private housing newbuild, where we’re expecting a 17% fall, and private housing RM&I, which we believe will fall 9%.
“Within private housebuilding, after the mini budget there was a sharp rise in mortgage rates, which led to a sharp fall in demand. That caused demand from major housebuilders in Q4 to be around 30 to 40% lower than the year before.
“Since the turn of the year, demand has been increasing as mortgage rates slow from that November peak, and there has been a pickup in demand from the property transaction side – but from that 40% lower base. We’re expecting to continue to see this recovery as we go into the key Spring selling season, but again, it is from that 2022 low point.
Private housing RM&I peaked in March 2022 at historic highs, but since then the industry has seen a fall in households spending on smaller discretionary improvement projects, which Professor Francis said is because families are worried about falls in real-term wages and are becoming more risk averse because of a fall in consumer confidence.
He noted that larger improvement projects did continue last year, mainly because planning application levels in 2021 held up, and so households who had received planning permission and could afford to complete those projects continued with them.
However, new planning applications fell by 19% last year, which is likely to feed through into a dearth of larger RM&I projects this year.
Commercial fitouts remain strong
Professor Francis said: “Other key areas worth highlighting this year are a 5.2% fall in commercial output. As I mentioned earlier, spending on commercial refurbishments and fitouts remains strong, partly because there is still demand for grade A quality office space.
“That’s driven by tenants who are coming to the end of their leases and looking to move to smaller office space with better quality facilities and more meeting rooms. The conversion of existing commercial premises into residential flats or industrial logistics spaces also remains very strong.
“Industrial activity is also at a historic high, based upon investment decisions signed off back in Autumn 2021 when there was strong demand for products and manufacturers were constrained by capacity. But new investment in warehouses appears to have peaked already, so after the current crop of projects finish in the first half of this year, we’re likely to see activity fall away in the second half of 2023 and into 2024.”
Looking ahead to 2024
Despite the concerns and the forecast fall in output, Professor Francis said the forecast for 2024 is more positive.
“We do have slight growth and an upward revision in outputs in 2024 compared to our Winter 2022 forecast. In terms of where the bounce back occurs, we think it will be primarily fuelled by private housing newbuild, with the biggest negative impact being in industrial, which we think will fall by 14.8% in 2024. This seems like a sharp fall, but remains a high value because the industrial sector is at such a peak right now.
“The key risks we’ve discussed in previous forecasts remain, but if the UK economy and consumer spending hold up better than expected, it may help the new housing and RMI sectors in particular. Material product supply issues have also eased a lot since 2021, though there are still some issues for products that contain microchips, such as boilers, some electrical products and smart meters, for example, as well as plasterboard.
“Material inflation was 27% in summer 2022, but is now 8.7% and we expect to see that continue to fall further. But even though the rate of price rises has slowed, we still have 42% higher material prices than we were working with before the pandemic.
Professor Francis also noted that price inflation varies widely depending on the material involved. Insulation is seeing the fastest price inflation at 35% in the year to March, but imported softwood prices have fallen 17.9% – though the price inflation for softwoods in 2020 and 2021 were at triple digits, so they haven’t yet returned to pre-pandemic levels.”