The Latest ONS Construction Output Data

Construction output volume in April 2023 was 0.6% lower than in March, 3.6% higher than a year ago and 6.0% higher than in January 2020, pre-pandemic, according to the Office for National Statistics (ONS). Firms in the construction supply chain that the CPA has been dealing with in recent weeks stated that, overall, April was significantly lower (and significantly lower than expected) whilst May had shown a pickup in activity despite the additional bank holidays.

There still appear to be issues with ONS’s estimation of construction price inflation (that it uses to turn value of construction output into volume) for repair and maintenance and this has been a problem since the energy, oil and commodity price spikes after Russia’s invasion of Ukraine in early 2022. The ONS appears to be underestimating inflation and, consequently, overestimating volume of r&m output. The ONS reported that r&m price inflation peaked at 7.2% in May 2022 whilst firms in the sector (SMEs and merchants) report to the CPA that r&m inflation was more than double this, which implies r&m volume of output is significantly lower than the ONS states and has been for more than a year.

This is a big issue as it means that private housing rm&i is now the second largest construction sector and in March 2023 (just before the latest fall in April) reached its highest level on record, 49.0% higher than in January 2020, which is not what small contractors and merchants report to the CPA. Firms in the sector report that rm&i activity grew to historic high levels in 2020 and 2021 after benefitting from the 'race for space' with homeowners wanting better quality indoor space and outdoor space plus homeowners also wanting better home-office facilities. However, they also reported that rm&i fell away last year from these historic highs as the rising cost of living falls in real wages plus economic uncertainty meant that smaller, discretionary rm&i was pushed back or cancelled. As a result, although activity in 2023 Q1 was higher than in the subdued Q4, the level of private housing rm&i activity is actually lower than a year ago and considerably lower than the ONS states it is. According to the ONS, private housing rm&i output in April 2023 was 5.7% lower than in March but 4.6% higher than a year earlier and still 40.5% higher than in January 2020, pre-pandemic.

Private housing output in April 2023 was 3.0% lower than in March, 5.8% lower than a year ago and 5.7% lower than at the pre-pandemic January 2020 level. Private housing output in April was also 12.1% lower than at the recent peak in May 2022, prior to the Truss-Kwarteng Mini-Budget debacle and consequent mortgage rate rises. Private housing output, however, still hasn't seen the full impact of the sharp (30-40%) fall in housing demand in 2022 Q4 and subdued level of demand since as house builders are still focused on completions so the NHBC 49% fall in housing registrations in 2023 Q1 (compared with a year earlier) has not fed through as yet. Furthermore, the recent sharp rise in markets’ expectations of peak interest rates (from the current 4.5% to 5.75% early next year in just the last month) will lead to steep rises in mortgage rates (as lenders price in the peak interest rate rises and additional risk and uncertainty), which is only likely to dampen housing market demand further and make house builders more risk averse regarding starting new developments in Q2, which will lead to falls in house building activity in the second half of the year.

Infrastructure output in April 2023 was 2.9% higher than in March, 2.4% higher than a year earlier and 25.5% higher than in January 2020 as work continues on major projects (such as HS2, Thames Tideway, Hinkley Point C) and long-term frameworks in regulated sectors (water, roads, rail, energy) that were previously signed up to and started. Work on current projects is going over budget and over time due to cost inflation issues over the past 18 months and persistent delays. In addition, the larger the project, the larger the delays and the more the projects are going overbudget. Going forward, projects signed up to and/or started in previous years will continue but government delays to new roads projects and HS2 work stopping at both Euston station and in Staffordshire will affect volumes of infrastructure activity near-term. Client hesitancy in regulated sectors, given concern about cost inflation plus budgetary constraints for council's local infrastructure (note that the ￡200 million announced in the Spring Budget for potholes and resurfacing is not ring-fenced for roads) will also adversely affect fortunes in the infrastructure sector but activity remains at a high level overall.

Industrial output in April 2023 was 1.0% higher than in March, 13.0% higher than a year ago and at its highest level on record driven by due to strong warehouses and factories activity. This is likely to continue to remain strong in 2023 Q2 & Q3. The new investment market for warehouses has now peaked, however, so after current projects have been built, activity is likely to fall away. Plus, factories activity is based on investment decisions in 2021 when demand was strong and manufacturers were capacity constrained. New manufacturing investment decisions in Autumn 2022, however, were put on hold due to economic and political instability after the Truss-Kwarteng Mini-Budget debacle so output is likely to fall away over the next 12-18 months after current projects finish.

Commercial output in April 2023 was 1.8% lower than in March but 7.5% higher than a year earlier (although note that April a year ago was particularly low figure compared with the rest of commercial output last year) and commercial output in April was still 27.0% lower than pre-pandemic. Firms working on high-end refurbishment and fit-out of existing developments report that activity is still higher than pre-pandemic as the demand for grade A quality office space remains strong and with an excess of existing floor space that is lower than grade A quality that lends itself towards further refurbishment activity. The majority of the commercial construction sector has historically been new build towers, where activity remains one-third lower than pre-pandemic. There are a few new build towers in the pipeline but just a fraction of those that were being built at the peak of the market back in 2017. New build towers are disproportionately affected by concerns over the demand for new commercial space given an excess of existing commercial space, construction cost inflation issues and rises in interest rates globally that affect finance costs.