Construction overview
Progress reliant on repair and maintenance
Construction output increased in 2022; however, the performance during the initial months of 2023 has been mixed, raising concerns about the outlook for the remainder of the year. Leading indicators of demand are showing a downward trend, and the growth in the construction sector is primarily driven by repair and maintenance (R&M) projects, while new construction work still lags behind pre-pandemic levels. Since the pandemic, private housing R&M has soared as people spend more time working from home. New regulations and Government retrofit schemes, along with an increasing focus on sustainability, have also boosted demand for R&M work.
In Q1 2023, there was a 0.7 percent increase in construction output compared to the last quarter of 2022. Notably, this increase was driven by a rise in R&M work, which saw substantial growth of 4.9 percent. On the other hand, new work experienced a decline of 1.9 percent during the same period.
Source: Office for National Statistics
There was a significant decline in total construction new orders in Q1 2023, with a contraction of 12.3 percent compared to the previous quarter and a 14.3 percent decline compared to the same period last year. This contraction was primarily driven by a decrease in new orders for private commercial projects and public housing.
Notably, the level of total new orders in the construction sector is now at its lowest point since the peak observed after the COVID-19 pandemic in Q2 2021. Five out of six sectors experienced a decline in new orders, with only other public new work showing growth.
Private commercial new orders declined by 22.3 percent, the largest decrease among all sectors. This was primarily due to declines in office and entertainment projects. Furthermore, new orders in the infrastructure sector also experienced a decline of 8.2 percent following the Government's decision to postpone some projects.
Source: Office for National Statistics
Although the rate of inflation has decreased, the price of materials continues to rise. According to the Department for Business and Trade (DBT) 'All Work' material price index, there was a 4.7 percent increase in building material costs compared to the previous year in April, a slight decrease from the 10.6 percent recorded in February. Despite this downward trend, material costs remain significantly higher, standing at 42.7 percent above the pre-COVID-19 levels of February 2020 and 12.9 percent higher than in January 2022, prior to the onset of the conflict in Ukraine.
Additionally, the British Pound remains weak against the US Dollar, which has an impact on input costs, particularly for items priced in Dollars such as oil and various other imported materials. Since its recent peak in May 2021, sterling has depreciated by 11.6 percent, further exacerbating the inflationary pressure on input costs.
Source: Department for Business and Trade, Bank of England
Labour shortages persist within the construction industry, but there are signs of weakness in the labour market. Total construction employment declined by 1.9 percent compared to the previous quarter and saw a 2.5 percent decrease on a yearly basis. A decrease in the number of job vacancies further highlights these weaknesses, with a quarterly drop of 9.1 percent. However, it is important to note that although vacancies are 14.9 percent below their peak of Q3 2022, they remain at a relatively high level.
The construction unemployment rate remains low, standing at 2.6 percent in the first quarter of 2023. This figure is 1.2 percentage points below the overall economy's unemployment rate. The combination of high vacancies and low unemployment suggests that skilled workers have relatively favourable conditions for finding new employment opportunities.
The construction industry has historically experienced a relatively high number of insolvencies compared to other industrial sectors. In Q1 2023, the number of total new company insolvencies in construction reached 1,099, representing an increase of 1.4 percent compared to the same period in the previous year. In the year to Q1 2023, the total number of construction insolvencies rose by 9.7 percent compared to the preceding period. The fall in output and increased input costs have squeezed margins, leading to a decline in contractor margins and pushing up insolvencies.
Source: Office for National Statistics
Among the various sectors within the construction industry, companies engaged in specialised construction activities were the most heavily impacted. When analysing the types of insolvencies, it is worth noting that creditors’ voluntary liquidations decreased by 1.6 percent. However, compulsory liquidations increased by 4.9 percent, pointing to a rise in instances where companies were legally compelled to enter liquidation.
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