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Construction sector exposed as business confidence declines

Author: ICAEW Insights

Published: 26 Oct 2023

UK construction confidence plummets amid economic challenges as bank charges and weather woes weigh on the sector.

Construction company confidence has taken a deep plunge as higher interest rates and weakening sales growth has lowered optimism in the sector. Company concerns over bank charges were also at record high according to ICAEW’s Business Confidence Monitor (BCM) Q3. UK businesses are now looking to the Autumn Statement for a clear plan for stability.

The quarterly study, which surveys 1,000 chartered accountants across the UK, reported a confidence index of 2.9 for Q3 2023, down from 6.1 in Q2. This is below the pre-pandemic average of 4.1.

“Business confidence unsurprisingly remains low given companies’ struggles with a myriad of financial challenges and weakening customer demand,” said Michael Izza, ICAEW Chief Executive. “A clear strategy is needed to increase the resilience of the UK economy, and we’d like to see this included in the Autumn Statement. Our members operating across every region and every sector want an economy underpinned by certainty, clarity, stability and the right long-term incentives to influence investment, employment and growth.”

Domestic sales growth slowed to its lowest level since Q3 2021, reflecting weakening confidence, the survey found. This was partly driven by slowing customer demand, with 37% of businesses citing this as a growing challenge, the highest since Q1 2021.

Concerns over bank charges may have also dragged down overall confidence. The proportion of firms reporting this as an increasing problem is at a record high as tighter financial conditions weigh on the economy.

Construction sector exposed

Confidence was weakest in the construction sector, plummeting sharply into negative territory (-30.5). This likely reflects the sector’s exposure to rising interest rates, high input costs and weak customer demand. Heavy rainfall caused delays to planned project work in the sector, which may have dampened sentiment further, the report found.

Suren Thiru, ICAEW Economies Director, said: “The economy showed increasing signs of distress in the third quarter as the squeeze from deteriorating customer demand and higher interest rates more than offset a boost from easing inflation. The construction sector endured a particularly atrocious quarter as a perfect storm of rising cost pressures, a slowing housing market and unseasonably poor weather obliterated sentiment and output.”

In contrast, confidence was higher among transport and storage companies due to a strong holiday season boosting demand for leisure travel.

The government must use next month’s Autumn Statement to set out a clear plan for a resilient UK economy that provides stability for businesses, to enable confidence to grow, ICAEW said.

Inflationary pressures ease further

Selling price inflation eased in the quarter following record growth in Q2. Businesses expect it to drop to its lowest level since Q1 2022 over the next 12 months as input cost inflation eases. Energy, water and mining are expected to cut their selling prices in the next year, while manufacturing and engineering are set to see big slowdowns in selling price inflation.

While still high by historical standards, salary growth did slow for the first time since Q4 2020 as hiring activity declined. It was weakest in the property sector as confidence slowed amid a deteriorating housing market. Salary growth was strongest among manufacturing, engineering and energy, water and mining firms, and is expected to slow over the coming year across all sectors.

Firms moderate investment plans

Capital investment growth continued to slow in Q3, reflecting the overall weakness in business sentiment and numerous financial challenges including the tax burden, bank charges, late payments and access to finance. Companies also continue to restrain their research and development spending.

Companies plan to further moderate increases in capital investment over the next year, with financial challenges expected to continue contributing to this squeeze.

“The forward-looking measures are disappointingly downbeat with weakening indicators of domestic activity, employment and investment intentions suggesting a difficult end of the year for the UK economy,” Thiru added.

A deep dive into the UK economy

ICAEW launched a new campaign, Resilience and Renewal, in September, which explores some of the most serious systemic challenges facing the UK economy. It brings together government ministers, leading academics, economists and thought leaders to look at how to build a better, more resilient future economy and the vital role UK business and chartered accountants play.

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