Economic overview

A bumpy ride

The UK economy slipped into contraction territory during Q3 2022, as Gross Domestic Product (GDP) fell by 0.3 percent on the quarter. However, the start of Q4 2022 brought some respite, with GDP growing by 0.5 percent in October and by 0.1 percent in November. If this expansion is maintained in December 2022 data, the UK will avoid entering a technical recession - two consecutive quarters of negative GDP growth.

This resilience is welcome, yet it may be short-lived. The economy is sluggish, and GDP shrank by 0.3 percent in the three months to November 2022 compared with the three months to August 2022. Nearly all sectors - except for construction - contributed to the UK’s economic slowdown as well, with production a particular laggard.

Source: Office for National Statistics

2023 is likely to offer a bumpy ride of variable baseline growth and plenty of statistical revisions. And while a recession may be deferred, it is still probable. When it does arrive, many expect it to be a favourably shallow, but prolonged, downturn.

High inflation continues to erode disposable incomes, reducing consumer spending and holding back economic growth. Data from the Office for National Statistics (ONS) shows that Britons’ real incomes fell by 2.6 percent during the year to the end of November 2022, one of the fastest-ever drops in real earnings.

Inflation, as measured by the Consumer Price Index (CPI), stood at 10.7 percent in November 2022. And while the CPI may have peaked in Q4 2022, cost pressures could remain elevated in 2023 before reducing sharply in 2024. Tighter monetary and fiscal policy should then constrain price growth, with inflation cooling further as supply bottlenecks ease and energy prices fall.

Source: ONS, OBR

Nevertheless, interest rates could rise beyond their current 3.5 percent level as the Bank of England targets low and stable inflation. Any reduction in interest rates will come gradually, as the Bank’s Monetary Policy Committee will be wary of allowing inflation to surge back.

Meanwhile, the UK labour market remains tight and the unemployment rate is relatively low, at 3.7 percent in the three months to November, amid high vacancies and persistent recruitment challenges. And while unemployment typically rises during a downturn, any increase should lag GDP’s contraction as vacancies tend to fall before redundancies accelerate.

While the wider UK economy has slowed down, the construction industry is keeping its head above water. Construction activity in November 2022 was flat compared to October, while quarterly growth stood at 0.3 percent.

Yet the pace of growth is slowing, and repair and maintenance activity hasn’t posted a positive quarter-on-quarter reading since July 2022. In many cases, domestic works are being delayed or halted as households grapple with heightened food and energy costs.

Source: Office for National Statistics

Even though construction new orders increased by 6.4 percent on the quarter in Q3 2022, levels of new work grew by a more modest 1.3 percent in the three months to November 2022.

However, the December 2022 S&P Global UK Construction Purchasing Managers’ Index made for grimmer reading, with both activity and new work found to be falling at the fastest pace since the depths of the pandemic in May 2020. In response, firms’ expectations for activity in the year ahead dipped into negative territory for only the sixth time on record, reflecting their fears about the near-term economic outlook.

This deterioration in sentiment is also reflected in Turner & Townsend’s latest contractor survey. A lack of confidence in the market to invest in new projects appears, for the first time, among the top three challenges contractors feel they face. Above it stood skilled labour shortages, in second place, with rising costs of construction in the first place.

While the economic indicators are still giving mixed messages, it’s clear that both the economy and UK construction are entering a sustained period of weakness. Whether the technical definition of a recession is met or not, the softening economy and decline in business sentiment will both pose significant challenges to the construction industry. Meeting those challenges successfully will require careful planning and pragmatic action.