The latest national Business Confidence Monitor (BCM) for Q2 2024 shows a sustained increase in confidence and is now at its highest level for two years, as businesses expect falling input price inflation to support further growth in demand and improved profits in the year ahead.
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 April to 22 June 2024.
- The Business Confidence Index for Construction grew again in Q2 2024, remaining above the national average. It is now at the highest point it has been since Q4 2021.
- The rise in confidence was underpinned by a moderate pick-up in domestic sales and profits growth, with companies optimistic that more significant improvements are set to come.
- The steep fall in input cost inflation stalled as some material prices rose during the survey period but the rate of input price inflation is forecast to fall below the historical norm.
- Employment growth also slowed but businesses expect to recruit at over double the historic average next year.
- Regulatory requirements remain close to their historic high, but customer demand is the main challenge for businesses and more widespread than in most other sectors amid growing concern about late payments.
- Construction businesses plan to keep growth in capital investment and R&D budgets around the historical average in the coming 12 months.
Business confidence in the Construction sector
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The Business Confidence Index for Construction rose again in the latest quarter, reaching +23.1, its highest level since Q4 2021 and above the national average (+16.7). Businesses in the sector are now among the most confident alongside those in Energy, Water & Mining (+23.6) and Banking, Finance & Insurance (+25.4), and sentiment is well above the historical average for the sector (+3.6).
The rise in confidence comes as recent ONS statistics show that monthly construction output grew by 1.9% in May 2024, following a fall of 1.1% in April. The May increase was evident in both new work and repair and maintenance, with ONS citing anecdotal evidence that warmer weather contributed to the improvement. The recovery appears to be broad-brushed with most sectors, including private and public housing and infrastructure, all returning growth in the month. Confidence in the sector is likely to be further buoyed by the continued fall in inflation, reaching the Bank of England’s 2% target for the first time in almost three years, and the expectation that interest rate reductions will soon follow.
Businesses may have also factored in a likely change in government, with Labour ahead in the polls throughout the election campaign which began halfway through the survey period. The Labour Party were clear that building more homes would be central to their plans to boost UK economic growth and this may have supported sentiment in the construction sector. Even without the change in government, conditions in the housing market have improved, with property prices rising by 0.2% between May and June, following a 0.4% rise in the previous month. The increase in prices may already reflect the fact that some major lenders have reduced their mortgage rates in anticipation of interest rate reductions to come.
Domestic sales growth and customer demand
Construction businesses are optimistic that the increase in domestic sales seen in the year to Q2 2024 are set to gather pace. Domestic sales growth increased to 2.3%, having dipped in the previous two quarters. While growth remains below the sector’s historical average (2.7%) and is weaker than most other sectors, businesses anticipate that domestic sales will leap to 6.1% in the coming year as interest rates begin to fall and household budgets continue to recover, fueling demand for construction work. However, despite this expectation, concern about customer demand rose in Q2 2024, with 46% of businesses in the sector citing the issue. This is the highest proportion of companies across all sectors and above the historical average for Construction (42%).
Input and selling prices, and profits growth
Input prices were on a steep downward trend in the construction sector, falling from 5.9% to 4.1% in Q1 2024 alone. However, businesses reported a break in that trend, with input prices rising to 4.5% in Q2 2024. The ONS construction materials index showed prices increasing by 0.8% between May and April 2024, with materials such as pipes and fittings, and metal doors and windows experiencing the greatest price increases over the year to May 2024. The new housing and repair and maintenance construction sectors were most impacted by price rises in May according to the ONS. The increase in input prices in the Construction sector was, however, broadly consistent with those seen economy-wide (4.4%) and Construction businesses expect that growth will ease further to 2.9% in the coming year, dipping below the historical norm for the sector (3.1%).
Selling price inflation in Construction continued to ease in the year to Q2 2024, reaching 2.9% which is somewhat lower than the UK average (3.2%). Companies expect the rate of price growth to ease to 2.2% in the coming year and close to the national average (2.3%). However, this rate of increase is still high compared to the historical norm (1.4%).
Encouragingly, businesses reported that profits growth in the Construction sector increased for the second successive quarter, with profits returning to their historical average of 2.3% in Q2 2024. However, businesses remain optimistic that the strong sales growth will help drive their profits to 6.1% in the coming 12 months, ahead of the UK expectation of 5.5%.
Employment and labour market challenges
Employment growth continued in Construction at 1.6% in the year to Q2 2024, slower than reported in the two previous quarters and marginally slower than the UK average of 1.8%. Businesses in the sector anticipate that to meet strong sales demand they will need to nearly double the recent rate of recruitment, and plan to lift employment growth to 3.0% next year, the fastest projected growth across all sectors apart from IT & Communications, which expects an increase of 3.1%.
Historically, Construction employment has grown by 1.2% on average since the survey began. Achieving much higher rates of growth next year may be a challenge for the industry which faced significant skills shortages in the wake of Brexit and the post-Covid rise in economic inactivity. Businesses have been reporting fewer issues in recent quarters and recruitment conditions appear to have eased but there are tentative signs that conditions may be tightening.
The ONS vacancies by industry data shows that the vacancy rate is at 2.6 per 100 employee jobs in the period March to May 2024, up from 2.4 in the previous quarter. Meanwhile the economy-wide vacancy rate stayed level at 2.8 vacancies per 100 employees over the two quarters. Furthermore, the proportion of employers reporting issues with staff turnover and the availability of non-management skills ticked-up in Q2 2024. Staff turnover was reported as a growing challenge by over a quarter of Construction businesses (26%), well above the historical average of 21%. And while the concern about the availability of non-management skills is below the norm at 24%, it is more prevalent than the UK average (21%).
The rise in salaries is also likely an ongoing concern for businesses and the decline in wages growth stalled in Q2 2024, remaining at 3.6%. While this increase was broadly in line with the national average (3.7%) it is still significantly ahead of the historical average for the sector of 2.0%. Construction companies anticipate slightly more modest increases over the next 12 months (3.2%), matching the UK average.
Business challenges
Alongside concerns about customer demand, which is now the greatest issue for the Construction sector, regulatory requirements were reported by 45% of businesses as a growing challenge, consistent with the previous quarter. This concern remains close to the historical high for the sector (50%).
Nearly half (46%) of Construction businesses reported customer demand as an issue, higher than in any other sector and considerably above the national average at 35%. There are other signs that trading conditions remain difficult for companies, with reports of late payment from customers rising to 36%, also higher than in any other sector and ahead of the historical average for Construction (27%). Reports of difficulties accessing capital have eased in the last two quarters but are marginally above the national average, it is similar too for bank charges now reported by 18% of businesses. While 29% of businesses say the tax burden is a growing challenge, almost double the historical average (16%).
Investment growth
After recent improvements, capital investment growth within the Construction sector dropped to 1.2% in Q2 2024 and marked the lowest growth in three years. In the year ahead, despite expected reductions in interest rates and growing demand, companies expect that the rate of growth in capital investment will improve only slightly to 1.4%, lagging behind the historical average (1.7%).
Meanwhile, R&D budgets continued to improve in Q2 2024, rising by 1.9% in the past year. However, companies are planning to scale back growth next year to 1.2%. This expansion will still be marginally above the historical norm of 1.1% but will lag the increase expected nationally (1.6%).
