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UK Business Confidence Monitor: Construction

Q4 2021: Sales outlook remains strong despite a host of supply-side issues.

  • Activity in the Construction sector has recovered through much of 2021, with domestic sales increasing at a faster rate than any other sector in Q4 2021, at 5.6%, year-on-year. And businesses expect a similarly fast rise in the year ahead.
  • However, companies are facing a range of supply-side challenges. This explains why the Business Confidence Index has fallen below its near record high from the previous quarter.
  • Input price inflation in Construction is much faster than nationally, as businesses deal with raw material shortages, transport bottlenecks and problems at ports due to Brexit.
  • Reflecting the strong sales outlook, businesses plan significant increases in employment. However, growing concerns over the availability of management and non-management skills may pose downside risks to this.
  • Construction companies have so far tried to overcome these labour supply challenges by increasing salaries more sharply than in other sectors.
  • Customer demand has eased as a growing issue, but the proportion of companies increasingly challenged by transport problems has surged to its highest rate in a decade.
  • Investment rates have improved, particularly with respect to capital spending. Further rises are also planned for the 12 months ahead. 
 

The Construction sector suffered an enormous shock to output during the peak of the pandemic, due to a collapse in demand for commercial and residential building work, along with disruptions to site activity and the supply of materials. Since then, activity in the sector has rebounded sharply, with particularly strong growth in renovation and repair work during the spring of 2021, as businesses prepared for a full reopening of the UK economy. However, there are supply-side issues that pose a downside risk to the sector’s recovery, with the surge in demand leading to transport bottlenecks and shortages of components and raw materials. Labour supply constraints could also be a factor that weighs on the ability of businesses to meet demand. 

Against that backdrop, the Construction Business Confidence Index stands at +34.6 in Q4 2021, so well above the historical average for the sector. However, the new challenges that businesses are now facing in the recovery phase of the pandemic mean that the Index is below the near-record high seen in the previous quarter. 

Domestic sales growth

The severe declines in sales suffered by Construction companies during the pandemic are now being offset by the rebound in activity seen through much of 2021. Domestic sales are 5.6% higher year-on-year in Q4 2021, the sharpest increase across the UK. And businesses expect that this sales recovery will continue over the next 12 months, with growth of 5.4% projected.

The latest Office for National Statistics (ONS) data suggest that in the 12 months to September 2021, total construction work was 10.2% higher than its level in the year to September 2020. New work on private industrial and commercial buildings remained some way below the levels of a year ago, perhaps reflecting a large number of companies still permitting home working. Instead, repair and maintenance work was the primary driver of the Construction sector’s recovery, as businesses have taken advantage of the lack of footfall in the pandemic to undertake renovation work and adjust their facilities for the post-COVID environment.

Input and selling prices

One of the difficulties facing Construction companies has been rising input costs. In the year to Q4 2021, input prices increased by 4.1%. With the exception of Manufacturing & Engineering, this is the fastest increase across all sectors. Throughout the pandemic, the sector was particularly troubled by the closure of supply merchants and by COVID-induced delays in the shipping of raw materials. And as the economy recovers, many of these supply-side issues have intensified. Supply bottlenecks have emerged for key materials and transport capacity constraints have pushed up shipping costs. The new UK-EU trade and customs barriers for imported materials could also be adding to these cost pressures. Businesses do project an easing of input price inflation over the next 12 months to 3.3%, possibly reflecting expectations that the supply issues will partly subside. Nevertheless, this will still be the joint fastest increase across all sectors, along with Manufacturing & Engineering, which faces similar challenges.

In response, businesses have started to pass on some of these costs to customers. Selling prices are 2.1% higher year-on-year in Q4 2021 and a further 1.7% rise is expected in the 12 months ahead.

Employment and skills

Businesses in Construction cut their employee levels during the pandemic, although the declines were much less severe than during the global financial crisis. This reflected the government furlough scheme, with around half of the sector’s workforce being placed on the scheme at some time during the recurring periods of lockdown in 2020. The rebound in activity through much of 2021 has resulted in a recovery in employment. Overall, this means that employee numbers are 1.5% higher year-on-year in Q4 2021. Companies also project a stronger 2.4% rise over the next 12 months.

However, these recruitment plans may be impeded by growing concerns over skills shortages in the sector. The availability of non-management skills has become a growing issue for 44% of businesses, the highest rate for any sector except Manufacturing & Engineering. And the availability of management skills is a growing challenge for 22% of companies, with only the Transport & Storage sector more troubled in this area. A key part of the explanation here will be labour supply bottlenecks, as companies try to quickly recruit in response to the release of pent-up demand for building work. Another important factor may be Brexit. Changes in the freedom of movement from the EU to the UK is likely to have hindered the ability of companies to recruit foreign workers, a practice that the sector has historically been particularly reliant on.

Companies have tried to tackle these skills shortages by increasing salaries. In the year to Q4 2021, average total salaries increased at a faster rate (2.4%) than in any other sector. Companies also anticipate a 2.7% increase in the 12 months ahead.

Business challenges

As well as labour market challenges, customer demand remains a widespread growing challenge. But while the proportion of companies increasingly challenged in this area (42%) has eased from its pandemic peak, transport problems have surged. 37% of businesses are facing growing difficulties over transport problems, the highest rate in a decade. Shortages of transport staff, freight capacity constraints, and Brexit-induced border problems, could all be contributing factors.

Investment growth

On a more positive note, investment rates have improved in the sector. Spending on capital assets is 2.8% higher, year-on-year, in Q4 2021, the sharpest increase across all sectors. For the year ahead, a further 1.9% rise is planned. Following growth of 1.4% in the 12 months to Q4 2021, Research & Development (R&D) budgets are expected to increase by the slightly more modest pace of 0.9%.