According to the Office for National Statistics (ONS), total construction output in September was 0.4% higher than in August after a slight dip in activity during Summer. It was also 5.7% higher than a year ago and it remained 3.2% higher than in January 2020, pre-pandemic.
The summary chart of output in the key construction sectors that industrial activity remains the strongest of the key construction sectors but began to fall in September (-2.9%). Private housing rm&i output continued to fall from a high base in September (-1.1%) but infrastructure activity rose in September (+2.8%) and continues to be robust, considerably stronger than pre-pandemic. Private housing new build fell marginally (-1.4%) but remained higher than pre-pandemic whilst, conversely, commercial output rose by 1.0% in September but remained 24.8% lower than in January 2020.
Private housing output in September was 1.4% lower than in August but 9.1% higher than a year ago although it is worth noting that a year ago materials availability was slowing projects, especially for some smaller house builders. Private housing output in September remained 4.7% higher than pre-pandemic and demand still remains strong for majors with most major house builders sold into 2023 Q1. Cancellations are rising but they remain low and although recent reservations are double-digit lower than a year ago, this is unsurprising as it occurred during the height of the chaos in the financial market in the aftermath of the former Chancellor's calamatous Mini Budget (when markets' expectations were initially that interest rates would rise to 6%, and consequently mortgage rates would rise to 7%-8%). House builders will be looking to what demand is like in the housing market as the markets calm, which initially occurred after the new Chancellor U-turned on most of the Mini Budget policies and should calm further after the Autumn Statement and independent analysis from the Office for Budget Responsibility (OBR). After this, the Bank of England's interest rate is likely to peak at 3.5%-4% (rather than the 6% expected after the Mini Budget). Initially, transactions in the general housing market are more likely to be affected than prices as falls in demand are partially offset by a reduced supply of homes onto the market. However, the key issue remains the extent to which rising mortgage rates and negative sentiment in the housing market affects transactions, prices and new build demand over the next year.
Private housing rm&i output in September was 1.1% lower than in August and 0.3% lower than the same month a year ago. According to the ONS, private housing rm&i output remained 24.5% higher than in January 2020, pre-pandemic. However, as the CPA has previously highlighted, the ONS may be underestimating the inflation in private housing rm&i, which it estimated as 5.5% in the year to Q3 (whereas firms we are dealing with report that rm&i inflation is 10%-12%). Consequently, the ONS may be overestimating the volume of rm&i output and, therefore, underestimating the rate at which private housing rm&i output is falling. Looking forward, given continued real wage falls and rising wider economic uncertainty, it would be expected that private housing rm&i output continues to fall over the next 12 months. Most areas of rm&i are falling with non-essential, discretionary improvements activity falling particularly sharply. However, it is worth noting that energy-efficient (insulation) activity and solar/PV work remains strong, unsurprisingly given the current concern over energy prices. It is worth noting that the falls in output are from a historic high point at the end of 2021 buoyed by the ‘race for space’ and, to a certain extent, this represents a return to trend levels of 2018-19 that were seen pre-pandemic.
Industrial output fell by 2.9% in September but this is from a historic high point due to strong warehouses activity that is likely to continue in the near-term due to warehouses projects in the pipeline. Also new factories activity was strong as manufacturers last year made decisions to invest in new facilities whilst experiencing strong demand and as they faced sustained capacity constraints. Looking forward, there are concerns that the warehouses investment market has peaked, which points towards falls in warehouses activity down on the ground from the second half of next year, albeit from a historic high level. Plus, there are concerns are that, given the current wider economic uncertainty, manufacturers are unlikely to go ahead with new factories projects that have not already broken ground as yet, particularly in the light of cost inflation issues.
Infrastructure output in September was 2.8% higher than in August but 4.6% lower than a year ago. It remains 16.5% higher than in January 2020, pre-pandemic. Robust activity is largely being sustained by major projects (HS2, Hinkley Point C, Thames Tideway) despite cost overruns and delays as well as long-term programmes in roads, rail, water and energy. However, looking forward there is hesitancy signing up to new infrastructure projects due to concerns over cost inflation plus local authority new work is also being hindered by constrained finance being shifted away to cover the increasing costs of essential repairs and maintenance.
In the commercial sector, output rose by 1.0% in September and it was 9.0% higher than a year earlier. However, output remained 24.8% lower than pre-pandemic. It is worth noting that the fortunes of firms working in commercial will heavily depend upon which part of the sector they are operating in. Contractors working on fit-out and refurbishment of grade A office space continue to report that work is still considerably higher than pre-pandemic and that labour availability is a key issue for them whilst firms working on new commercial towers report that activity has risen in recent months but remains at levels more than one-third lower than pre-pandemic. Looking forward, fit out and refurb of existing commercial developments is likely to remain strong but the key issue will be for new towers projects that have not broken ground as yet given concerns over demand in the current economic environment as well as cost inflation affecting project viability.
