UK Business Confidence Monitor: Construction
Q3 2021: Businesses optimistic despite cost pressures and labour supply concerns.
- Weak demand, logistical problems and supply shortages resulted in a collapse in output during the earlier stages of the pandemic. Since then, the sector has seen a recovery build, although supply-chain difficulties are posing some risk to this.
- Businesses anticipate strong growth in domestic sales in the year ahead as demand for residential and commercial building work recovers. This helps to explain why the Confidence Index for Construction remains in firmly positive territory.
- However, input prices increased at a faster rate than in any other sector over the last year. And further rises are projected for the coming 12 months. Higher shipping costs, raw material shortages and Brexit-induced import barriers are all contributing factors.
- Concerns over skills availability remain widespread, partly because Brexit has made it more difficult for companies to recruit foreign workers. Construction companies have so far tried to tackle this by increasing salaries more sharply than in other sectors.
- Customer demand has eased as a growing challenge but the proportion of companies citing transport problems remains elevated when compared to historical norms.
- On a positive note, investment is set to increase over the next year. Across all types, growth in capital spending will be the fastest. Research & Development (R&D) budgets are also set to continue rising over the next 12 months.
Business confidence has markedly improved in the Construction sector in recent quarters and now stands at +45.1. While optimism is at a near-record high, the past year has been a very challenging one for the sector. Despite being permitted to continue operating through periods of lockdown, output was hampered by a fall in demand for commercial building work, supply shortages and pauses to onsite activity. However, the sector has seen output recover strongly as the UK followed the government’s roadmap out of lockdown. This was driven partly by growth in renovation and repair work as businesses prepared for the reopening of the economy. And reflecting the overall improvement in confidence, businesses are optimistic in their sales outlook for the year ahead as pent-up demand for building work is released. The government’s plan to significantly expand the UK’s housing stock in the coming years may also be lifting sentiment for businesses in residential construction.
Domestic sales growth
Construction is closely linked to the performance of the wider UK economy. The damaging impact of the pandemic on general economic activity had an adverse effect on output in Construction. However, the rebound in output over recent months has begun to offset the sharp declines seen during the earlier stages of the pandemic. As a result, domestic sales are now only marginally lower (-0.2%) in the year to Q3 2021 than in the previous 12 months. For the year ahead, businesses are optimistic. Domestic sales are forecast to be 5.4% higher by Q3 2022, as pent-up demand for residential and commercial building work is released.
The latest ONS data also highlight the strong recovery that has taken place as coronavirus measures have been eased. In the 12 months to June 2021, total construction work is reported to be 4.7% above its level from the year before. New work on private industrial and commercial buildings is still some way below its level from a year ago, partly because of uncertainties created by the shift to home working. Nevertheless, the gap here is narrowing as demand picks up. The main impetus for Construction’s recent recovery has, however, come from repair and maintenance work, as businesses prepared for the reopening of the UK economy, and in some cases took advantage of the lull in demand to undertake remedial work or modifications to existing buildings. Output in this area is now 11.9% above its level from a year ago.
That said, on a month-on-month basis, the ONS data suggest that the sector’s recovery is possibly losing momentum. The latest reading for June revealed a monthly fall in total building work of 1.3%. Problems in accessing raw materials and rising transport costs are probable reasons for this.
Input and selling prices and profits growth
Adding to the difficulties of the past year, businesses in Construction have seen input prices rise at a sharper rate than in any other sector. In the year to Q3 2021 input prices increased by 3.1%, nearly double the all-sector average. The closure of prominent builders’ merchants during parts of 2020 and delays in the shipping of raw materials both contributed to this. Since then, cost pressures have not eased. The pick-up in global economic activity has resulted in supply bottlenecks for key materials. Shipping costs have also risen for companies in the sector due to transport capacity constraints. The post-Brexit trading environment is another challenge for businesses, as new EU-UK trade and customs barriers have pushed up costs for many imported raw materials. And companies anticipate a further 2.7% rise in input costs in the 12 months ahead, the second fastest rate across sectors behind Manufacturing & Engineering.
In response, businesses plan to increase their selling prices charged to customers by 1.6%, although this will trail the increase in input costs. And while profits are forecast to rise by 5.7% as sales bounce back, this is the weakest outlook across all sectors in Q3 2021.
Employment and skills
Businesses did cut employment in the earlier stages of the pandemic, although the contractions here were more modest when compared to those seen during the global financial crisis. This is largely because of the government’s Coronavirus Job Retention Scheme, which was especially important in protecting jobs within Construction, with nearly half of the sector’s workforce using the scheme during the first lockdown period. Since then, activity has recovered in the sector and businesses have started to hire again. The net effect is that in the year to Q3 2021, employee numbers are broadly unchanged from their level in the previous year. The coming 12 months should see a 2.7% increase in employment, which would be the sharpest increase since the final quarter of 2017.
Businesses in the Construction sector are also being increasingly challenged by shortages of skills. In Q3 2021, 28% of companies cite the availability of non-management skills as a growing challenge. This is the joint highest rate, along with Manufacturing, across sectors. And in only one other sector (Banking, Finance & Insurance) is the availability of management skills more widely cited as a pressing issue.
Part of the explanation here may be the reluctance of former workers to re-enter the workforce as coronavirus uncertainties remain. Another key reason is likely to be Brexit. New restrictions on the freedom of movement from the EU have probably reduced the ability of companies to recruit foreign workers, which the Construction sector has always relied on. The 2017 Home Building Federation Census reported that, at that time, almost 20% of the UK’s building workforce originated from other EU states. Against that backdrop, companies have tried to attract workers by increasing salaries. Over the last 12 months average total salaries went up at a faster rate than in any other sector, at 1.3%. As these issues persist, a further 2.2% increase is planned for the year to Q3 2022.
Business challengesWhile labour supply challenges are prominent, it is customer demand that remains the most widely reported growing challenge. But whereas the proportion of businesses citing this (36%) has eased from recent quarters, the percentage of companies reporting transport problems (26%) has risen sharply. A shortage of transport staff, freight capacity constraints and Brexit-related port delays are all probable reasons for this.
It is encouraging, however, that investment spending is set to increase in the sector, after being limited during the pandemic. Across all forms of investment, spending on capital assets should grow the fastest in the year ahead, at 3.0%. Research & Development (R&D) budgets will also rise, albeit at the more modest rate of 0.8%. And staff development budgets should be 2.2% higher by Q3 2022 as businesses expand their headcounts.