The construction sector has begun the year with “very limited momentum” towards recovery after a difficult 2023, a senior industry analyst has said.
Interest rates have plateaued since last August but remain high by historical levels at 5.25 per cent. This affects financing for construction projects by “making large upfront investments less attractive”, said Rebecca Larkin, head of construction research at the Construction Products Association (CPA).
“We are definitely in a worse position than when we started [2023],” she said.
Speaking to Construction News, she added that high inflation had delayed decision-making, “so you’ve got those two elements there slowing [activity] down, but also on the sector-specific side, there are things like RAAC [reinforced autoclaved aerated concrete] remediation that are particularly pertinent for public non-housing”.
Larkin predicted that funding allocated for new-build schools and hospitals may be redirected to RAAC remediation. “We know that there’s no or very little new funding for remediation programmes,” she noted.
The CPA’s latest market forecast predicted a 6.8 per cent decline in construction output in 2023. Larkin said the forecast for 2024 was a further 0.3 per cent contraction, “so ‘less worse’ is the best way of putting it, I think”.
This outlook is coloured by assumptions of a stagnant broader economy with flatlining GDP growth, unchanged interest rates and inflation staying higher than the Bank of England’s target of 2 per cent.
“It’s very much the case that those conditions are constraining a recovery in housing and RM&I [repair, maintenance and improvement], which are the two biggest construction sub-sectors, accounting for 38 per cent of output,” Larkin said.
“When you add in the commercial sector as well, which is also susceptible to weak economic conditions, that is 50 per cent of construction output.”
Hence “there’s very limited momentum” towards a recovery for construction before the second half of this year, Larkin added.
“But the recovery will come. It will take some time and we forecast 1.8 per cent growth in 2025 as construction starts to grow while the economy starts to stabilise and improve.”
The pace of recovery could be influenced by the need for construction firms and their supply chains to comply with various pieces of post-Grenfell building safety legislation, whose full implications are yet to be seen.
“On the practical side, I think [law changes are] likely to slow down things in the earlier planning and design stages, but it’s important to remember that legislation and its resulting changes are overwhelmingly beneficial for the safety and quality within construction,” Larkin said. “Any slowdown that legislation does produce is a very small cost compared to the benefit that will come out of it.”
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