Whisper it quietly, but the industry might soon be able to heave a sigh of relief after all the gloom. Over the past two years, hikes in inflation and interest rates have left the sector battered by administrations, financial write-offs and belt-tightening.
“New business is now expanding at its strongest pace in more than two years”
Paul Sloman, PwC UK
But finance teams and senior leaders may now be thinking about recovery. First came the new Labour government’s commitment to deliver more infrastructure projects and new homes. Then lower inflation figures persuaded the Bank of England (BoE) on 1 August to cut the base interest rate by 0.25 percentage points to 5 per cent.
More positive news followed. The purchasing manager’s index (PMI) reading for construction in July was 55.3, beating the forecast of 52.5 and the 55.2 registered in June. And the latest monthly data from the Office for National Statistics (ONS) showed 0.5 per cent growth in construction activity in June.
Construction analysts concluded the uptick is very real. The ONS data “heralds the early signs of recovery”, said Rebecca Larkin, head of construction research at the Construction Products Association.
Paul Sloman, engineering and construction sector leader at PwC UK, said July’s PMI data “is a signal of recovery, market confidence and growth for the sector”. He added: “New business is now expanding at its strongest pace in more than two years, employment levels have risen for a third consecutive month and purchasing activity is at levels not seen in almost two years.”
This raises the prospect of more stable times for the industry. Chris Smith, head of specialist equipment at Aldermore, told Construction News: “While the reduction in the base rate might seem minor, it represents a crucial step forward. It strengthens market confidence and sets the stage for continued economic support, benefiting the construction sector in the long run.”
More builders and SME construction firms applied for finance to support growth and development in the second quarter of this year than at any time in the past 18 months, according to Purbeck Insurance Services, which provides personal guarantee insurance for small business loans.
Remaining cautious
But some contractors remain cautious. In its latest annual accounts filed on 6 August, OHOB Group said it was still concerned over the prospect of price increases and high interest rates.
Despite a steady order book and a 4 per cent rise in pre-tax profit to £21m for the year to 31 March 2024, chairman Tom O’Brien said caution “remains the order of the day”.
“Our latest forecasts have private housing starts rising 14 per cent in 2025… albeit from a low level this year”
Noble Francis, CPA
Allan Wilen, economics director at data intelligence firm Glenigan, predicted the recovery will not be spread evenly across the sector. Glenigan has forecast that industrial work will return to growth from 2025, when logistics firms will need more units to meet consumer demand.
Professor Noble Francis, economics director at the Construction Products Association (CPA), agreed. He told CN: “Given the poor run rate on housebuilding at the end of last year and early this year, overall this year housebuilding is still likely to fall.” He predicted that growth in housebuilding will return in 2025 and continue in 2026.
Wilen predicted “a progressive recovery in project starts” for housebuilding as confidence and mortgage deals return among new buyers.
“Our latest forecasts have private housing starts rising 14 per cent in 2025 and a further 7 per cent in 2026, albeit from a low level this year.” The latest ONS data showed that private housebuilding activity fell by 4.1 per cent in June compared with May.
Private housing repair, maintenance and improvement (RMI) work also takes time to filter through. “There tends to be a six-to-nine-month lag between a sustained rise in property transactions and RMI output,” Francis said.
Risks to recovery
The current upturn may not improve the bottom line for firms, especially those dealing with legacy contracts, until the value of projects increase. Wilen said: “The value of main contract awards fell back 15 per cent last year and continued to soften during the first half of 2024.”
In August, contractor Morrisroe reported a pre-tax loss of £1.3m in 2023. Group chief executive Brian Morrisroe said the firm had now reviewed all legacy projects and adjusted schemes where “cost forecasts were found to be inaccurate”.
Administrations across the sector remain an issue – 19 firms went under in July, although this was down from 31 in June and 24 the month before.
There are other potential obstacles that could impact recovery. The CPA warned of growing concern among members over the availability of labour. A Q2 survey revealed that a record 29 per cent of heavy side manufacturers and 27 per cent of those on the light side (producing materials like aggregates, cement and steel) are worried about labour shortages.
In its rate cut statement, the BoE cautioned that inflation could “increase to around 2.75 per cent in the second half of this year”.
But economists might be overplaying the problems, according to one industry leader. Announcing a strong half-year profit of £70.1m on 8 August, John Morgan, chief executive of Morgan Sindall, said: “The challenging market conditions that we experienced in 2023 are easing.”
Sloman at PwC is also positive: “It is encouraging to see employment growing at its fastest pace in a year, owing to the continued agility and adaptability of construction businesses. Overall, the sector seems to be preparing itself for a busy second half of the year.”
Ratings agency Fitch has also forecast more good news in the autumn. It expects further interest rate cuts this year to 4.5 per cent and more reductions in 2025 and 2026 to 3 per cent.
And Smith said: “It’s important construction businesses can be empowered at this time [by further rate cuts] to optimise their financial resources and grow sensibly so that they can continue to deliver projects.”
