After rising by an estimated 6.5% in 2022, we expect total construction output to decline by 6.3% in 2023, and 4.7% in 2024. Meanwhile, the economy is forecast to contract by 2.5% in 2023.
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 we expect base rates to settle near to 3%.
With the price of money arguably the most important driver of economic and financial behaviour, the ongoing rise in base rates represents a marked change from the recent past, especially for those sectors of the construction industry that rely upon debt – commercial and residential building. Residential building is forecast to experience a sharp drop in work over 2023/2024, with private housing starts expected to fall from an estimated 155,000 in 2022 to 110,000 over 2023/2024. Commercial building work is forecast to fall beyond 2023, due to higher borrowing costs and structural change, particularly concerning office building and work from home.
Construction work funded by the public sector has a mixed outlook, with various capital programmes (health, law & order, HS2) serving to raise volumes over the short-term, while beyond then financial restraint will impact. Overall, the ability of the state to invest in line with the nation’s requirements is hampered by a lack of political vision and severely stretched finances.
Industrial building has recently grown strongly, thanks in part to a boom in warehouse work, and in the factory sector growth in pharmaceutical and electric vehicle related work. The outlook for the latter is mixed – it offers long term-hope, but over the short-term cost and supply chain issues are evident. In the warehouse market economic recession and higher borrowing costs are expected to result in reduced development volumes, although from very high levels.