CPA Autumn Forecasts more tough times ahead for construction

CPA’s Autumn Forecasts construction output is expected to fall by 6.8% in 2023, similar to the 7% contraction forecast three months ago, before a further marginal fall of 0.3% in 2024.

This is a revision down from the 0.7% growth forecast in the Summer publication due to a weaker economic backdrop, although UK interest rates are now likely to have reached a peak that is lower than previous expectations – it is now anticipated that they will remain at this level for longer, until 2025, due to stubborn inflation.

CPA head of construction research, Rebecca Larkin, said: “With only a couple of months left in a difficult year for construction and looking forward to 2024, the evidence suggests it will still be a while before the clouds begin to lift.

“Both new build housing and rm&i have taken a significant hit from rising interest rates, falling real wages and weak economic growth. Although further rises in interest rates now appear off the table, the prospect of rising oil prices keeping inflation elevated suggests rates are likely to remain at peak for longer and throughout next year. This will keep demand subdued for house purchases and improvements.

“It will also create a step-change in financing costs compared to the record-low rates of the past decade for new commercial and industrial projects that is likely to limit appetite for investment and development.

“With infrastructure now set for two years of flatlining activity, it does shine a light on the importance of major projects as a driver of growth in the sector and for construction overall. In particular, government’s chopping and changing on infrastructure spending decisions this year has removed roads, rail and offshore wind projects from the near-term pipeline and has further weakened the industry’s confidence that government announcements can translate into tangible delivery.”

Private housing is the largest constructor sector and is the sector forecasted to be the worst affected by the economic conditions this year. Since the end of last year there has been a 30-40% fall in demand and it has remained this way throughout Summer and early Autumn.

As a result, after a 19% fall in completions and output this year, completions are forecast to remain flat in 2024 with no growth until 2025. Whilst the balance of risks to private housing clearly remains on the downside, a positive policy stimulus in the Chancellor’s Autumn Statement would help demand to start to recover next year.

Private housing rm&i is the second-largest construction sector and activity continues to be on a general downward trend after the “race for space” spike between 2020 and 2022, output is forecast to fall 11% this year.

In the third-largest sector, infrastructure activity remains strong down on the ground due to work continuing on major projects such as HS2 between Old Oak Common and Birmingham, the Thames Tideway Tunnel and Hinkley Point C. Unfortunately however, following on from earlier announcements of delays to major road and rail schemes, it appears that more roads projects are being pushed back or cancelled than anticipated in the forecasts in Summer, whilst new projects continue to be delayed due to strong cost escalation and viability concerns.

The impact of the government’s decision to cancel HS2 between Birmingham and Manchester is limited as the majority of this work was planned to occur beyond the forecast period. Similarly, the £36 billion of local and regional projects around the country announced by the Prime Minister are unlikely to start before 2029, at the earliest, if they occur at all. Overall, infrastructure output is expected to fall by 0.5% in 2023, from its current high level, before remaining broadly flat (-0.1%) in 2024.