Past experience suggests that when annual GDP growth is less than 2%, construction falls into recession. But if the nation rallies to meet the social and environmental challenges, the architecture profession could yet have a chance to shine
The UK economy is fragile and the possibility that it will teeter into recession looms. That does not bode well for construction as it thrives on a buoyant economy and is prone to decline in a climate of slow growth and uncertainty.
The need for economic growth to spur construction activity can be seen in Chart 1 (above). This shows the economic growth of construction in each year between 1947 and 2016 plotted against the growth in gross domestic product (GDP) in each of those years. Apart from 1947, in every year that the GDP fell, economic activity in construction also fell. And, while not a hard and fast rule, the trendline suggests that when GDP growth is below 2 per cent, construction has a habit of falling into recession.
Current forecasts for the economy suggest that a recession will be avoided but, as Chart 2 shows, the rate of growth over the next four to five years is forecast to be pallid. Annual growth is expected to be weaker than the average of just above 2 per cent in the period between 2012 and 2019 when the economy was pulling out of recession. And it will be much weaker than the 2.75 per cent average growth rate experienced between the millennium and the global financial crisis. Because the economy is stuttering does not mean that construction will inevitably fall into recession, but it suggests the likelihood is high.
It is worth reflecting on the growth in the nation’s GDP since the start of the pandemic – it has risen in real terms by about 2 per cent. But economic activity per capita has fallen by almost 1 per cent over that period. So, one might characterise the growth as being driven by more people rather than more activity per person.
Summing up, we have economic forecasts suggesting GDP growth will be below 2 per cent for the next four years. We have political pressures to curb population growth through reduced immigration. And we have longstanding evidence suggesting low growth leads to falls in construction activity. That’s not fertile ground in which to plant seeds of optimism.
However, it would be unduly pessimistic to see a construction recession as inevitable if the economy grows at less than 2 per cent. Equally, it would be foolish to find too much solace in the outlier of 1947, which saw construction grow solidly while the economy shrank. But the activity that took place in the post-war period may provide seeds of hope, particularly for architects. It was a period in which they flourished as the nation embarked on a massive reorganisation of the built environment.
Turning our focus back to the present, bad news relating to the construction sector is flowing ever more freely. Two RICS reports for the third quarter of 2023 make uneasy reading. The commercial property market report found 58 per cent of respondents believe the market to be in a downturn phase. The UK Construction Monitor reported a net balance of -10 per cent of respondents reporting an increase in activity – the worst result since the early months of the pandemic.
Meanwhile, the S&P Global CIPS UK Construction PMI, having bobbled between growth and fall over recent months, took a deep dive from 50.8 in August to 45.0 in September, suggesting a fall from pallid growth to recession, 50 marking the boundary between growth and decline. The October figure lifted slightly to 45.6. The recent decline is the biggest drop since May 2020 and adds to recession fears. Adding further to this growing gloom, media reports on company collapses in construction have become near-daily events. Insolvencies in construction on an annualised basis are up a third since the end of 2019.
Closer to home, the RIBA Future Trends survey shows workload expectations among architects returning almost to stable in September. But as Chart 3 (below) shows, the measure is on a downward trajectory when taking a three-month moving average of responses.
Theoretically, the Office for National Statistics figures for construction output provide the best measure of where the industry and its subsectors stand in relation to the past. Oddly, they seem to have been remarkably positive post-pandemic, as we can see in Chart 4 (below). Comparing turnover in the 12 months to August with previous years, most main sectors have grown in 2023 – housing is the notable exception.
But while the numbers seem positive, there is a caveat. Many experts who closely track this data fear the deflators used to adjust for inflation may be faulty and so inflating the level of recorded output. Their concern is focused mainly on the housing repair, maintenance and improvement (RMI) sector, where the data suggest strong growth against other industry measures, notably from builders’ merchant sales, which suggest the sector has receded.
Understandably, this possible glitch in the official data has made it trickier to assess with confidence the health of the construction sector and has created issues for forecasters looking to assess its prospects.
And, turning to the future, the latest forecast from the Construction Products Association makes for sobering reading. Its recent central forecast suggests construction activity will fall almost 7 per cent this year with a further slight decline in 2024 and a very gentle recovery in 2025. But what is clear from Chart 5 (below) is that, while activity might remain stronger as seen in the upper scenario, there is also a chance reflected in the lower scenario of a significantly larger and more damaging decline.
Looking at how the main sectors (excluding infrastructure) are likely to perform, Chart 6 (below) shows growth in the period from 2019 to 2022 (broadly the pandemic impacted period) and the expected growth between 2022 and 2025. It illustrates that, despite a big fall in activity up to 2022, those working on office and retail work face further declines. Education too is set to see a continued fall, as is public housing work. Public housing RMI and entertainment, having declined in recent years, are both expected to bounce back, although not to previous levels.
Sectors that did grow healthily in the period up to 2022, despite or indeed in part because of the blight cast by the pandemic, such as private new housing, private housing RMI, and industrial, are all expected to fall into recession. The slowdown in private new housing is expected to be a major drag on construction activity. Health is the only major sector captured below that will see growth continue through the forecast period.
What the chart does not show is how far and how fast activity in the office and retail sectors has fallen over a longer period. Twenty years ago, these sectors accounted for about a quarter of all new construction work (including infrastructure). Between them, they accounted for more work than new housing. Today, new housing generates almost four times the amount of work for the construction sector as offices and retail combined, leaving aside repairs and maintenance.
As the data shows, we have witnessed and will continue to witness major shifts in the types of work demanded by construction clients. This reflects the major changes we are making and need to make to reshape the built environment for the future.
Yes, the demand for offices is feeling the impact of working from home, and the retail sector is reeling from the expansion of online shopping. But these a just part of much deeper changes that are in train. These are unavoidable as we address major forces within the political, economic and social fabric of the nation, demanding that we decarbonise the economy, adapt to accommodate a rapidly changing demographic mix, and rethink how we use spaces as we adjust to both the risks and opportunities created by digitisation.
Reflecting on the post-war era, just like today it was a period when the nation needed to rethink and redesign its built environment. That led to significant growth in construction. Despite the shackles of a massive public debt, huge amounts of effort and cash went into building a better Britain.
It may be wishful thinking to suggest the spirit of post-war Britain can be reincarnated. It may be foolhardy to believe that the nation might rally around a cause to radically change and enhance the built environment to meet the social, economic, environmental, and technical challenges of the future. But even if the money to fund the required construction is limited, the need to massively reconfigure the built environment will be present for many years hence. This provides a moment for architects to shine again, finding effective ways to improve buildings and spaces, albeit with limited funding.