Construction overview
Construction output grows for the eighth consecutive quarter, albeit at a slower pace
Following a robust expansion of 6.5 percent in 2022, construction sector output has slowed in 2023. As of Q3 2023, construction output increased by 0.1 percent on the quarter and by 2.5 percent on the year. This slowdown is primarily attributed to contractions in housebuilding, in both public and private initiatives, along with lower demand in the industrial sector. The shift in momentum underscores a notable change in the dynamics of the construction industry, reflecting the nuanced challenges faced across the board.
The November S&P Global / CIPS UK Construction PMI highlight prevalent concerns from financial factors, including a scarcity of tender opportunities and prolonged decision-making by clients, reflecting apprehensions about the broader economic landscape. After two consecutive readings below the "no change" marker, the survey is signalling a contraction in construction activity.
Growth came exclusively from all repair and maintenance (R&M) projects, which increased by 0.7 percent, while total new work decreased by 0.3 percent. However, there are nuances within sectoral output. Within R&M the increase came from non-housing whilst housing R&M output fell. Private commercial new works were the top performer with a 5.1 percent increase in the quarter while infrastructure new work grew by 0.8%. All other sectors decreased on the quarter.
Performance of private commercial new works has fluctuated since Q4 2022, for example, it was the second worst performing sub-sector in Q2 of this year but the best in Q3. This lack of direction isn't surprising given the economic uncertainty and high borrowing rates.
Refurbishment and retrofitting continue to remain strong, particularly in the London office market, to improve energy efficiency and attract staff back to office working.
Source: Office for National Statistics
While overall construction output edged up during Q3, there was more positive news with new orders (or new demand) growing by 3.9 percent in Q3 2023 over Q2 after three consecutive quarters of contractions. This change was driven by increases in most sectors, with other non-housing public new work and infrastructure leading the way, recording increases of 23.7 and 14.2 percent, respectively. On the other hand, private industrial was the only sector that witnessed a decrease in new orders, falling by 7.8 percent.
Housebuilders are continuing to scale back their building plans due to the weakening of activity and higher borrowing and purchase costs. Private developers, however, are making more use of discounts and other incentives to support house sales – a trend seen in previous housing downturns. Additionally, they are increasingly selling to housing associations and build-to-rent investors, rather than to individual buyers.
Many commercial real estate projects, such as warehouses and data centres, continued. However, work on a growing number of projects had been slowed, and new projects were progressively being postponed.
The recent Deloitte’s London Office Crane Survey (Winter 2023) reported that in Q3 there was 5.1 million square feet (sq. ft.) of new construction starting across 43 schemes in Central London the highest since the survey began in 2005. In terms of square footage, this was double the volume in Q3 2022 when there were 30 schemes. Demand for premium office space is still largely fuelling the increasing construction levels this year.
Source: Office for National Statistics
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