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Economic Insight

UK Business Confidence Monitor: Construction

Q1 2024: Business Confidence rises to highest level in two and a half years

The latest national Business Confidence Monitor (BCM) for Q1 2024 shows a significant improvement in sentiment compared to weak yet positive confidence in the previous quarter and the average for 2023. The index rose above its pre-pandemic average for the first time since Q1 2022, as economic prospects brightened.

The survey results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions and company sizes, ensuring a representative picture of the UK economy. The latest quarterly findings are based on the period 15 January to 22 March 2024.

  • The Business Confidence Index for Construction grew in Q1 2024 and sits above the national average and is at the highest point it has been since Q4 2021.
  • While Construction experienced the joint-weakest expansion of any sector in the year to Q1 2024, growth is expected to be much stronger over the coming 12 months, a significant improvement compared to the historical average.
  • Input price inflation also continued to ease and further moderation is expected in the coming year, with Construction companies anticipating one of the smallest increases of any sector. Selling prices will also see a modest slowdown throughout the year ahead.
  • There was further acceleration in employment growth within the sector, outpacing the national average and the expansion next year will still outpace the historical average.
  • Customer demand remains a prevalent issue in Construction, but regulatory requirements are now the most widespread concern for businesses. Labour market challenges have largely dissipated but competition in the marketplace is now a prominent concern for the sector.
  • The Construction sector increased capital investment in line with the national average in the year to Q1 2024. Growth will moderate slightly in the next year but will be in line with the historical average. R&D budget growth will follow a similar trajectory.

Business confidence in the Construction sector

The Business Confidence Index for Construction improved considerably in the latest quarter rising to +16.2, its highest level since Q4 2021 and above the national average (+14.4). The increased confidence recorded for Construction saw its index move into positive territory after two consecutive quarters below zero, and is now well above the historical average for the sector (+3.3).

Improved confidence is likely to be a sign that construction businesses are optimistic that the significant fall in inflation seen through the survey period will begin to feed through to interest rate reductions in the near term, and that prospects for the housing market look better for the year ahead. Indeed, there has been no significant house price correction despite prolonged weak economic growth and high interest rates, primarily as unemployment has remained low, keeping a lid on mortgage defaults that would otherwise have undermined house prices through forced sales. Nationwide reported that annual house prices rose by 1.6% in March 2024 compared with a year ago, up from 1.2% in February, which will have fed into sentiment for housebuilders and the sector more widely.

However, recent ONS statistics confirm that the Construction sector remains under pressure. Construction output increased by 1.1% in January 2024 only to contract by 1.9% in February. The ONS cites anecdotal survey evidence that heavy rainfall delayed planned work and impacted construction output in the month. Overall construction output fell by 1.0% in the three months to February with a fall in new work driving the decline but partially offset by the growth in repair and maintenance. Crucially, construction companies are optimistic that sales growth will accelerate in the year ahead and, coupled with much lower input prices, profits growth will recover strongly.

Domestic sales growth and customer demand

Persistent inflation has increased both the cost of materials and labour and eroded consumers’ income, hindering activity within the Construction sector. It therefore is unsurprising that the sector recorded the joint-weakest domestic sales growth of any sector in the year to Q1 2024, rising by just 2.0%. This growth was notably below both the historical norm (2.7%) and the national average (3.3%).

With the various economic challenges in recent years, customer demand has been the most pressing challenge for businesses within the Construction sector. While 40% of construction companies cited demand as a growing concern, the prevalence of this issue has fallen significantly for the second consecutive quarter. This drop in citations could be linked to the improved expectations for domestic sales growth of 4.6% in the year ahead and in turn bolstering sentiment within the Construction sector.

Input and selling prices, and profits growth

After seeing the highest increase of any sector in the previous quarter, annual input price inflation in the Construction sector slowed significantly in Q1 2024, to 4.1%. This rise in costs was notably lower than the growth seen nationally (4.7%). Companies within the sector expect input price growth to fall below the historical average (3.1%) in the coming year, with a 2.4% increase anticipated. This is lower than almost all other sectors, with only Retail & Wholesale expecting input prices to rise at a slower rate.

Selling price inflation in Construction continued to ease in the year to Q1 2024, matching the national average price growth of 3.2%. Companies expect the rate of price expansion to ease marginally in the coming year to 2.7%, however this increase is nearly double the historical norm (1.4%) and will only be slower than IT & Communications and Transport & Storage.

Weak domestic sales growth alongside rising input costs meant that Construction companies recorded the weakest profits growth of any sector, at just 0.3% over the year. However, with inflation expected to continue to ease and growing optimism about sales, companies anticipate profit growth will improve significantly in the next 12 months, with a predicted expansion of 4.7%. Despite this marked uplift in profit expectations, companies in the sector project lower profits growth compared to the increase expected for the UK as a whole (5.1%).

Employment and labour market challenges

The continued uplift in employment growth in the Construction sector is likely another sign that companies within the sector are feeling more optimistic about their prospects. Staff levels increased by 2.5% in the year to Q1 2024, up from 1.9% in the previous quarter. This growth was marginally ahead of the national average (2.0%) and over double the historical average (1.2%).

This improved growth in employment has been in part facilitated by the reduction in labour market challenges which have been prevalent in the Construction sector in recent years. There was a significant drop in the number of companies citing staff turnover (14%) and the availability of management skills (12%) and non-management skills (15%) in Q1 2024. With these challenges dissipating and employment experiencing solid growth, it would appear that many of the recruitment challenges construction companies were facing post-pandemic have eased to a degree. Businesses are still wary that this could change, however, and are cautious about the year ahead, anticipating a modest slowdown in employment growth to 2.0%.

Easing labour supply and the drop in inflation appears to have fed through to salary growth in the Construction sector, which softened to 3.6% in the year to Q1 2024. This increase was broadly in line with the national average (3.7%). Construction businesses anticipate slightly more modest increases over the next 12 months (3.4%), however, this is higher than the rate seen historically (2.0%).

Business challenges

The number of companies having issues with the labour market has decreased, but the Construction sector faced a different set of challenges in Q1 2024. There was a marked increase in the number of Construction businesses citing regulatory requirements as a rising challenge compared to Q4 2023. Regulations were the most widespread issue within the sector, with 45% of businesses reporting the issue as a growing challenge, and the highest since Q4 2022. This was only marginally behind the historical high for the sector (50%).

Despite a decline in the past two quarters, customer demand does remain a prevalent concern, with 40% of businesses in the sector reporting it as a growing challenge. However, this is the lowest the issue has been since Q3 2022, with it falling marginally below the historical average of 42%. One in three Construction companies cite competition in the marketplace as a growing challenge, only Retail & Wholesale had a higher proportion of companies reporting this as a rising concern.

Financial challenges continue to be prominent for the Construction sector. The tax burden was the most prevalent of these concerns in Q1 2024, with 29% of businesses reporting that they experienced increased difficulty in this regard. Alongside this concern, approximately one in five Construction companies reported bank charges, access to capital and late payments.

Investment growth

Capital investment growth within the Construction sector picked up for the second consecutive quarter in Q1 2024, rising to 2.4%. This was the sharpest expansion for the sector since Q4 2022 and was broadly in line with the national average (2.3%). In the year ahead, companies expect that the rate of growth in capital investment will moderate slightly to 1.7%, a similar rate to the historical average (1.6%).

R&D budgets will follow a similar trajectory. After an uplift in the rate of expansion to 1.8% in the past year, companies are planning to scale back growth next year to 1.3%. This expansion will still be marginally above the historical norm of 1.1% but will lag the increase expected nationally (1.6%).

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