Construction to shrink 2.1% this year as housing drag continues

Aaron Morby 4 weeks ago

Forecasters have grown more pessimistic about the outlook for this year and now warn the industry will shrink by 2.1% dragged down by the two biggest output sectors, housing new build; and housing refurb and maintenance.

Just nine months ago construction was expected to see weak growth in 2024. But after several downgrades economists have taken out the red pen again.

According to the the Construction Products Association’s Winter Forecast the industry will now have to wait until 2025 for a rebound of 2%.

Recent disruptions in the Red Sea, however, have been identified as a key risk to the forecasts, potentially leading to supply issues such as delays and accelerating cost inflation.

Private housing – the largest construction sector – suffered a double-digit fall last year after a spike in mortgage rates hit housing market demand.

Consequently, many house builders have reported a fall of around 25-35% in demand, in addition to the regulatory issues that smaller house builders continue to face in particular around planning, as well as water and nutrient neutrality.

The lagged effect of higher mortgage rates is likely to continue to weigh upon property transactions this year with private housing output expected to fall by a further 4%.

Looking to next year, a gradual fall in interest rates should boost demand with private housing output then expected to rise by 4%.

Key points in Winter forecast

  • Construction output falls by 2.1% in 2024 and rises by 2% in 2025
  • Private housing output falls by a further 4% in 2024 and rises by 4% in 2025
  • Private housing RM&I to fall by 4% in 2024 before rising by 3% in 2025
  • Infrastructure output to fall by 0.5% in 2024 and rise by 1.2% in 2025
  • Industrial output to fall by 7.5% in 2023 and by 3.6% in 2025

Smaller project work is likely to continue to remain flat in the first half of this year as household spending remains tight, whilst the continued fall in property transactions in the first half of this year is likely to hit larger project work for the remainder of 2024, warn forecasters.

This is likely to be partially offset though by strong activity on energy-efficiency retrofit such as insulation and solar photovoltaic work. Overall, private housing rm&i output is expected to fall by 4% in 2024 before growth of 3% in 2025.

In infrastructure, which is the third-largest construction sector, activity remains strong down on the ground driven by major projects like HS2 Phase One and Hinkley Point C.

While water and electricity work remain well set, there is concern over pauses and delays to National Highways projects.

As a result, overall, infrastructure output is expected to fall by 0.5% this year, a third successive marginal fall in output, before rising by 1.2% in 2025.

CPA Economics Director, Noble Francis said: “The bad weather at the start of January has already affected the construction industry but there is still lots of time for a catch-up in activity when the weather improves.

“The bigger problems for the industry are the hits to activity last year in its two largest sectors – private housing and private housing rm&i.

“These are likely to continue into 2024. Even with expected falls in interest and mortgage rates in the second half of this year, rates are likely to remain relatively high and so demand in the housing market, house building sector and rm&i sector is likely to remain subdued overall.”

He added: “Given the importance of housing to the UK economy, it was disappointing that the Chancellor’s Autumn Statement last year had little to help the beleaguered sector.

“It is critical that we see measures to help boost house building and homeownership from government in the upcoming Spring Budget.

“Furthermore, government should do more on infrastructure delivery given that the sector is set for its third consecutive fall in output. This is despite announcements from government on new projects to compensate for the cancelling of the Northern leg of HS2.”

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