The outlook for construction is very much tied to the path of interest rates, which have risen steeply since early 2022. Such are the lag effects of monetary policy that we are yet to fully see the economic impact of 5% or so base rates. We thus expect the economy to slip into recession over 2023/2024, and construction output to contract by roughly 10% over the years 2023-2025.
More than a decade of near zero base rates has 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 past decade, especially for those sectors of the construction industry that rely upon debt. Private residential development, which now accounts for almost 40% of new work construction (a record high) faces a tough short-term outlook, with housing starts forecast to drop from roughly 160,000 in 2022 to around 100,000 units over 2023/2024.
Commercial building work now commands just 20% of new work construction, the lowest share since the 1970s. It has suffered with the demise of PFI and a steep downturn in retail building (retail building volumes are 75% below the 2007 peak), and so much rests with the office sector.
Construction work funded by the public sector has a mixed outlook, with various capital programmes (health, law & order, HS2) serving to help 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.
Industrial building has grown strongly over recent years, in part due to a boom in warehouse work, and in the factory sector growth in pharmaceutical and Net Zero related work. The latter offers hope, although much rests with funding and the issue of who pays – Net Zero is a grand ambition, the costs of which have yet to be outlined or understood.