While the industry may be recovering from the lows of the pandemic, the longer-term picture suggests a step-change in construction activity is needed to avoid calamity
Last month the Bank of England governor used the word 'apocalyptic' in a Treasury Committee meeting. Ears naturally pricked up. Later, when asked if a potential trade war sparked by the row over the Northern Ireland protocol was one of the four horsemen, he replied: 'We will run out of horsemen.'
All scary stuff. But it is true that the UK faces multiple serious economic, social, and political threats: inflation, looming climate disaster, trade disputes with the EU, the persistent long-tail impacts of the pandemic on people’s health and business supply chains. Unsurprisingly, the public inevitably is getting edgy. In May, the headline figure for the GfK Consumer Confidence Barometer fell again, hitting minus 40. That is the worst score since it began in 1974.
The gloom is not restricted to the UK. International Monetary Fund managing director Kristalina Georgieva says the global economy faces perhaps its biggest test since the Second World War. In a co-written blog in late May, she argued: 'We face a potential confluence of calamities.'
It would be nice to ignore these concerns. Turn off the news. Or, with recent data showing patchy signals that look promising in parts of the construction sector, it is tempting to focus on the upsides and dismiss the worrying undercurrents. But that would probably be a poor move when the runes appear to spell impending danger. It is worth remembering that when the economy takes a hit, construction tends to suffer more than most other economic sectors.
Looking at the data for the first quarter of 2022, there was a 3.8 per cent jump in total construction output, with a leap of 9.2 per cent in industrial work and new house-building up 6.3 per cent. And, if we look at the spring forecast from the Construction Products Association, the overall picture looks relatively bright, even though the forecasters downgraded expectations of growth from the winter forecast. Chart 1 shows the expected growth of all construction work, plus the splits of new and repair, maintenance and improvement (RM&I).
But within this there are interesting and important shifts emerging. The chart below shows change over two timeframes: 2021 to 2023, which is the forecast from where we are; and 2019 to 2023, which is how the future might look compared with pre-pandemic levels in 2019.
The big message is that the drivers of growth have changed. Public housing, although important, is a relatively small sector and is in many ways dependent on state intervention. This sector could shift dramatically with a change in political imperatives. More importantly in terms of scale is the large drop in commercial work. Despite an expected rise of more than 8 per cent between 2021 and 2023, the sector will still be more than 20 per cent smaller in 2023 than in 2019.
It is worth unpicking the trends within the sector. On one hand, there has been a major slowdown in investment in new building. On the other hand, there has been a surge in fit-out work as occupiers and landlords have looked to reshape the use of buildings, in part to adapt them to a changing world that, for example, includes more hybrid working.
Pulling back to a more macro view, the infrastructure sector is now dominating growth and is expected to continue to do so. Meanwhile, a surge in industrial work is helping to underpin overall growth. Behind this changing mix, the forecasters were optimistic of growth in most sectors in the years ahead. But these will in the main be filling the holes left by the drop in work during the pandemic. So, the new normal mix of construction work will be different from that seen in 2019.
Within this, the path suggested in the chart for private housing RMI might seem a bit perplexing and is worth some reflection. Activity in the sector was in decline before the pandemic struck, in part down to a slowdown in London. But after the initial lockdown, it surged, ending in output 6 per cent higher in 2021 than in 2019. That surge is not captured in the chart, which suggests falling activity over the next two years.
The forecast for the private housing RMI sector does, however, have some upside risks, as economists or investors might say. The rising cost of fuel may, for example, incentivise more household investment in homes. But on the downside, since the forecasters last met, inflation has surged further, China has enforced stringent lockdowns and the Ukraine war has deepened the global supply crisis. This suggests future forecasts might be shaded down.
Historically, the drag on industry growth would have tended to come from the demand side. Currently, growing supply-side issues are the main challenge, with rapidly rising prices in both materials and labour exacerbating the problems of availability. There is double-digit inflation in many core building materials and wages of PAYE employees in construction are up more than 7 per cent on the year to April.
The above chart shows the extraordinary rise in consumer price inflation. This presents problems that most company executives and those estimating pricing will not have faced in their working life. It also accentuates the risks of conflict in an industry that has an unenviable record for contractual disputes. And it adds the type of uncertainty that leaves clients uneasy and less willing to invest.
In the private housing sector, some of the sting of inflation in materials and labour will be taken out by high house price inflation (see chart below). Set against the land price, this has supported strong margins and provides a cushion against the pressure of rising labour and materials costs
But among the more concerning drags on output will be the depleted labour force. The chart below shows how the construction workforce remains well below the levels of 2019, having suffered a far bigger drop when the pandemic struck. The embedded fragility in the workforce resting on ageing UK-born workers and a large cohort of younger EU workers appears to have crumbled, with large numbers retiring or leaving and not returning.
These constraints of skills and labour pose a particular challenge at a critical period. The need for a step-change in construction activity is clear. The UK, indeed the world, must reconfigure the built environment to cope with a rapidly changing world that embraces new ways of living and copes with rapid climate change. How to find the money to pay for this is one thing? But even if funding pours into the UK construction sector, it still faces a more intractable problem. Can it find the physical and human resources needed?
Innovation is often presented as a saviour – and it will help. But much of the work that lies ahead will be more labour intensive as we seek to retrofit and adapt existing buildings and infrastructure. To meet that challenge will mean confronting long-term structural problems that have dogged construction for decades and to which there clearly are no quick fixes.
The danger is obvious and, based on past evidence, may prove unavoidable. The temptation will be to focus on the 'apocalypse now', such as the near-term crises created by inflation, supply shortages, and growing economic and political unease. But this would simply push the longer-term imperatives into the background until they re-emerge as an 'apocalypse later'.
That must be avoided, particularly in the construction sector, which is critical to any long-term solution.