Building the Future: Trends Shaping Construction in July 2023
Building the Future: Trends Shaping Construction in July 2023
The latest data from the Office for National Statistics (ONS) states that monthly construction output volumes in Great Britain are estimated to have decreased by 0.2% in May 2023. May’s fall in output is largely attributed to a decrease in new work and the ONS has cited anecdotal evidence that points to a slowdown in private housing amid customer’s economic worries. The ONS has also stated that, whilst there has been an overall increase in output in the three-month period to May 2023 (predominantly due to a rise in repair and maintenance), this is the weakest growth since the 0.1% fall in output in the three months to August 2022. Overall rising borrowing costs are contributing to a subdued outlook for the UK housing market.
The slowdown in demand for private housing could potentially get worse in the near future as many house owners that have a mortgage are still insulated from rising interest rates due to having longer-term fixed rates. As these fixed rates come to an end the average borrower will be facing substantial rate increases and therefore the affordability of housing will be greatly impacted. This squeeze on borrowers may drive demand down, which in turn is likely to further slowdown house price growth (which according to the June House Price Index from e.surv has slowed for the tenth month in a row) and put further pressures on the UK housing market.
Construction insolvency continues to be high (insolvency.gov.uk stats)
Monthly insolvency statistics, prepared by the Insolvency Service, continue to show that the construction sector has a high business failure rate. Corporate insolvencies in the construction sector equated to c. 18% of total corporate insolvencies in February and March 2023, and c 17% in April 2023. This is against a backdrop of an overall rise in corporate insolvencies of c. 40% compared to twelve months ago and it is worth noting that corporate insolvency levels have now returned to, and exceeded, pre-pandemic levels.
The UK construction sector is consistently ranked number one for corporate insolvencies, with more than 3,000 firms failing in the last 12 months. Many failures can be attributed to rising costs and labour shortages, which cannot be easily absorbed due to intrinsically low margins.
Impact upon profitability of larger contractors due to supply chain failures.
Interruptions in the supply chain have negatively affected almost all industries in the last 12 months, and the construction sector has certainly not been immune to these issues. A number of the larger contractors have seen these difficult trading conditions directly impact pre-tax profit levels. Shortages in construction materials, lack of skilled workers and the continuing effects of Brexit has led to substantial price increases since the start of the pandemic, and where projects were secured at pre-inflation prices, many subcontractors have struggled to accommodate these unpredicted cost increases. When a failure occurs in the supply chain, progress on site is severely impacted and the larger contractors are finding it difficult to source a replacement that doesn’t come with a substantial cost premium.
Overall these are challenging times for UK construction, which are evidenced and highlighted by the above statistics. There is clearly a continuing lack of confidence in the sector and evidence that the industry is still a fair way from recovery.
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