As we move through 2023 it is becoming clear that inflation is proving more stubborn than expected by the Bank of England, and that base rates will have to stay higher, and for longer than most would like. For construction, the fallout from higher base rates (together with restricted public sector investment) is a forecast decline of roughly 10% in the volume of work to 2025.
Higher interest rates are not, in our view, a temporary shock to the system from which they will adjust back to previous levels, but more an adjustment to a new rate of inflation over the medium-term, which we view as being around 4%. As such, base rates are forecast to settle closer to 4% than 2% over the medium-term.
Over ten years of near zero base rates have led many to forget that interest rates – the price of money- are a key determinant of economic and financial behaviour. The recent rise in base rates thus represents a marked change from the recent past, especially for those sectors of the construction industry that rely upon debt. Private residential development in particular faces a tough short-term outlook, with housing starts forecast to drop to around 110,000 units by 2024.
Construction work funded by the public sector has a mixed outlook, with various capital programmes (health, law & order, HS2) serving to buoy volumes over the short-term, while beyond then financial restraint, as indicated in the March 2023 Budget, will impact. The ability of the state to invest in line with the nation’s requirements is hampered by severely stretched finances and distorted priorities.
Industrial building has grown strongly over recent years, in part due to a boom in warehouse work, as well as in the factory sector growth in pharmaceutical and Net Zero related work. The latter offers hope, although much rests with affordability, as in funding of whatever means to enable the rollout of Net Zero.