The broad picture is for a mild recession in the UK but how will it affect different sectors and regions? Brian Green drills down into the data to access likely outcomes and whether construction activity is moving away from London
So how is the trail ahead looking for those hitched to the construction wagon train? The simple answer is mixed, as is often the case. But there is plenty to warrant concern.
The International Monetary Fund (IMF) reckons the UK will stand alone among the world’s biggest economies as it slides into a mild recession this year. The Bank of England, after a very gloomy forecast three months ago, is more upbeat. But its prognosis of a mild recession and no net growth in GDP until 2026 is unsettling.
Meanwhile, looking at construction prospects, the Construction Products Association (CPA) forecast released in late January suggests output will fall 4.7 per cent in 2023, with a slight clawback of 0.6 per cent in 2024.
The overall impression emerging from a montage of forecasts is that things are not looking good but they could have been worse. However, these abstract portraits of economic prospects, even when examined in detail, provoke a more personal question to most readers: what does it mean for me?
These forecasts can only do so much to answer that question. They are broad-brushed and paint generalised pictures that capture generalised groups of firms and individuals. Hopefully too, they prove false where they highlight problems ahead that can be fixed. But for all those caveats, they can help guide to the future. This provides time to mitigate against the worst threats and take advantage of potential opportunities.
Getting to the nitty gritty: where are we and where are we going? To start, we need to understand how we got here. The primary and obvious reasons are clear and well-rehearsed. Firstly, the pandemic. Secondly, the war in Ukraine. Thirdly, Brexit. Some may deem this contentious, but the Bank of England, the Office for Budget Responsibility and the IMF all see significant negative economic impacts from Brexit.
There is of course a further factor lurking in the background that should be noted: quantitative tightening (QT) – basically, the reversal or unwinding of quantitative easing (QE). This means, from a built environment perspective, if QE increased liquidity and raised asset prices (property being a major asset), then QT tracks in the opposite direction.
The good news from the IMF is that, while the UK was marked down in the latest forecast, it sees a slightly brighter picture across the globe. As a nation reliant on trade, this is positive for the UK.
Turning to construction, the latest CPA forecast sees weaker prospects than its November forecast. And while its main forecast sees a fall of 4.7 per cent in 2023, there is an upper scenario (if things go well) of a 1.1 per cent fall and a lower of an 8.9 per cent fall (if things go badly), as we can see in Chart 1 (above). The risks appear weighted on the downside.
Within this aggregate forecast, there are big differences in the fortunes of each sector as Chart 2 (below) illustrates. Housing, both new homes and repair, maintenance, and improvement (RMI) faces the hardest hit. The bulk of new housing delivered through private sales is pegged to fall 11 per cent, suppressed by big uncertainties and lowering transactions in the market. This will knock on into the delivery of public housing, which is expected to fall by 10 per cent.
Indeed, the latest S&P Global/CIPS UK Construction PMI release in early February pointed to a sharp decline in housing. However, the future of the private new homes sector is currently very unpredictable, with big downside risks. This uncertainty is revealed in the forecast penned into the lower scenario, a 19 per cent fall in work in 2023.
More worrying for architects, particularly smaller firms working on local projects, is that private housing RMI is expected to fall by 9 per cent this year after a 4 per cent fall in 2022. But this is from a high base after the boom sparked by the pandemic. Meanwhile, commercial work is expected to continue its downward path in 2023 before bottoming out in 2024.
On the positive side, buoyancy in both infrastructure and industrial work is expected to continue, though sadly, they are not sectors that traditionally provide the richest pickings for architects.
While these aggregate figures for Great Britain are important, the spread of work geographically and how the mix of work is mutating both nationally and regionally is what really matters to most firms and the workforce.
The main ONS construction output data clearly shows major shifts in the mix of work underway at a national level. And the CPA forecast suggests this underlying change in the mix of construction work will continue. Comparing the 2023 forecast figures with those of 2016 reveals a rise of 57 per cent in infrastructure work and a 33 per cent drop in commercial work. Meanwhile, the industrial sector, buoyed in part by a growing appetite for more warehousing, shows a rise of about a quarter.
Work in the housing RMI sector did get a boost from a surge prompted by the pandemic. And there is widespread agreement that more improvements to housing are essential to hit net-zero targets. But the market is driven by household finances, which provide effective demand. These are currently strained. Meanwhile, the cost of labour and materials is putting projects further out of reach for many households.
The CPA doesn’t do regional forecasts. But the Office for National Statistics provides modelled estimates, while labour market forecasts from Construction Industry Training Board’s (CITB) Construction Skills Network (CSN) include regional workload forecasts. Together these provide reasonably good estimates of the sector shares of work and the prospects over coming years.
What bursts from the data is the huge role that infrastructure projects play in shifts in regional workloads. London in recent years has enjoyed massive investment in infrastructure with megaprojects such as Thames Tideway and Crossrail. Now large projects outside the capital, such as HS2, are creating high levels of activity elsewhere. This is very apparent in the West Midlands.
There is a view that the flow of work is increasingly favouring those outside London. Undeniably there appears to be a broader transformation in the workload which in part is a shift in the share of work away from London. But this is not driven by the levelling up agenda, however much invested MPs may suggest it is. The regional ebbs and flows of work need to be seen within a longer timeframe.
Looking at London’s share of construction output over the past 25 years is intriguing. Based on the estimate made by ONS, in 1997 London accounted for about 15 per cent of all GB construction output work. By the time of the financial crisis, this had risen to about 17 per cent. Some may find this ironic, but after the crash, its share surged to about 22 per cent. More recently its share has declined but not by much. As a point of reference, London accounts for about 13.5 per cent of Great Britain’s population. But, in fairness, its population has swelled hugely over recent decades and this will have driven investment in construction.
Much attention has also been paid to surging activity in the North West, often in discussions about levelling up. The figures do suggest its share of overall GB construction activity has risen in recent years. It hit a 25-year high in early 2021 of just over 12 per cent, falling back more recently to 11 per cent. Given its average share over the past 25 years is 10.5 per cent and its population share is 11.4 per cent, the recent surge is perhaps overhyped. Although it should be registered that the choice of what is built rather than the volume is ultimately more important in terms of social and economic impact.
So the suggestion that there are seismic shifts in the offing and we are set to see a resurgent North should be tempered. Indeed, if it is left to the market, there are problems ahead for the North and other regions where land values tend to be lower.
While down from extraordinary peaks, exceptionally high inflation has hit the construction sector, as is clear from Chart 3 (below). Given the market value of construction within the economics of property development, high inflation will disproportionately affect projects in locations with low land values. This is likely to mean harder knocks for Scotland, Wales and the North East. The reason is that, by and large, materials and labour represent a larger share of the development cost where land values and property prices are low.
Indeed, looking forward, the CITB’s CSN report forecasts for workload growth regionally points to the East of England seeing the strongest growth over the next five years, with London and the South East faring almost as well. But interestingly, it plumps for Yorkshire and the Humber as being a standout region for growth over the period 2022 to 2027, with an expansion in workloads that is close to matching that in the East of England.
Aside from detailed forecasts, there is a more general point. Increasingly, the data points to a steadily emerging underlying transformation in both the mix and spread of construction work within Britain with potentially very different growth paths between sectors and regions. It is hard to quantify the detail because the shape of this transformation rests on political policies.
This transition, paradigm shift even, will favour some architects and others working in construction. It will unsettle others. It will create winners and losers. More winners than losers hopefully, given the need to transform the built environment is, arguably, greater than it has been for generations: the need to accommodate an ageing population, the need to decarbonise, the need to reconfigure the building stock to address massive changes in working, shopping, and leisure habits, and the constantly debated need to level up. These are all very pressing.
But in the meantime, the industry has a recession to deal with. So a picture emerges, as we look to the future, of a growing tension between short-term pressures caused by a faltering economy, and the long-term but pressing needs of the nation that will eventually lead to a transformation in the mix of construction work undertaken.
Keeping afloat, dealing with the pressure of high inflation, and retaining loyal and valuable staff will test firms, some to the limit. They will feel under pressure to take whatever work comes along.
However, a smarter approach for firms, if they can find the ways and means to do it, may be to refresh and reinforce their longer-term strategy, clarifying their aspirations. Then, holding that in mind, wherever possible align their short-term decision-making to further these aims: seeking out and taking work that fits; working with clients that share their long-term perspective; and deepening knowledge in the key and emerging areas of work needed to further their long-term ambitions.
This may be hard to pull off. But it would be an investment in the future for the wagon trains of construction pioneers on the rocky trail to the new opportunities that lie ahead.