The latest UK Construction Monitor says confidence is rising in the UK construction sector helped by the prospect of falling interest rates over the course of the coming year.
The latest (Q4 2023) UK Construction Monitor has presented a more optimistic picture as to the state of the industry helped by the prospect of falling interest rates over the course of the coming year.
This shift in mood is, however, relatively modest with most key metrics in the survey still sending a cautious message.
RICS senior economist Tarrant Parsons said:
“Although current conditions across the UK construction industry remain relatively subdued, the latest survey feedback shows a gradual improvement in forward-looking sentiment. Supported by the prospect of easing interest rates later this year, overall workloads are anticipated to rise, with respondents anticipating this pick-up will be accompanied by a rise in employment levels across the industry. That said, the challenge around existing skills shortages remains a persistent theme in the Q4 results.”
The report shows the headline net balance for workloads, which captures total activity for the whole of the construction industry, remains slightly negative at -8%. That said, this represents a less downbeat figure compared to Q3 when a net balance of -10% of respondents reported a decrease in activity.
Breaking this down by sector, it is evident that there continues to be a visible degree of divergence in workload trends at a disaggregated level. Infrastructure still remains a relatively bright spot but momentum has slowed through the back end of last year with the net balance reading of +9% as against +10% in Q3 (the average in the first half of 2023 was +20%). At the other end of the spectrum, private housing workloads remain stuck in negative territory albeit a little less so than previously (-21% vs -26%) while the reading for public housing actually deteriorated (-14% v-7%).
Significantly, the shifting mood around the prospects for interest rates is being reflected, to a greater or lesser extent, in the credit conditions metrics captured in the survey. A net balance of 30% of contributors still concluded that the credit environment worsened in the final three months of the year but this was the least negative reading for this indicator since the second quarter of 2022. For the next three months, the credit indicator shows a marked improvement (from -25% to -14%) while at the twelve month time horizon, the series is back in positive territory for the first time since Q1 2021.
Whilst access to credit may gradually improve as the year wears on, financial constraints continue to be viewed as the major impediment to businesses within the construction sector at the present time; just under two-thirds of respondents reported this to be so. Moreover, there has also been a slight rise in the percentage of respondents who indicate insufficient demand as being a constraint on activity (36% vs 32% last quarter); this is the highest share since the back end of 2020.
Interestingly, despite the more cautious tone to many of the activity metrics in this survey, including new business enquiries (net balance -1%), the series designed to provide insight around recruitment is still strongly positive (+32%). And while labour shortages have eased from the highwater mark a couple of years back when around 80% of respondents were signalling a challenge in hiring, the result in the latest survey is still close to 50%. In addition, skill shortages in specific areas still remain acute. So for example, roughly the same proportion point to shortages of both quantity and building surveyors and an even higher share identify problems around skilled trades.
Given the ongoing labour issues, it is perhaps not surprising that the indicator designed to provide a steer on business commitment to training and development is still in positive territory despite the difficult profits environment (the current margins indicators was -16% in Q4). So a net balance reading of +19% report a rise in planned investment in this area which is slightly up on the +17% reported in Q3.
Looking forward over the next 12 months, the feedback from surveyors is a little more upbeat than in Q3 with the headline workloads indicator climbing from +6% to +12%. Within this, it is predictably the infrastructure segment that is leading the way even if the number is some way off the highs reported in 2022. Private non-residential workloads are also envisaged picking up modestly over the year while the net balance for residential is still indicative of a broadly flat trend (+5% v -3% in Q3). Employment is also viewed as likely to continuing rising despite the difficulties around recruitment with a net of +20% perceiving this to be the case.
When it comes to the profits outlook, the survey aims to ascertain the the judgement of participants in two very different ways. The first question focuses on how profit margins are likely to change over the year in net balance terms. The reading of -8% is down from -14% in the last survey is actually the least negative result since the early part of 2022 (which could reflect hopes around interest rates). The second question requests projections for tender prices and costs (in point estimate terms). This suggests that the latter will continue to rise by slightly more than the former over the period ahead with both skilled labour and material costs seen as likely as likely to increase by something in the region of 5%.
Source: CDN
