Q4: Concerns about the tax burden, regulation and faltering demand sinks confidence in the Construction sector.
The survey results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions and company sizes, ensuring a representative picture of the UK economy. The latest quarterly findings are based on the period 14 October to 13 December 2024.
- The Business Confidence Index for Construction sank to +0.2 in Q4 2024 from +25.3 in the previous quarter, the largest drop in confidence across all sectors surveyed. While this is in line with the national average, it is below the historical sector norm.
- The slump in confidence was underpinned by concerns about regulatory requirements, the tax burden, faltering demand and signs of persistent inflationary pressure.
- While domestic sales improved, input price inflation remains elevated, and businesses in the Construction sector expect it to remain above the national average in the year ahead.
- Employment has been expanding faster than the sectoral historic average and is expected to pick up slightly, but the availability of non-management skills remains a key challenge.
- Investment conditions appear to remain difficult for the sector and capital investment was the lowest across all sectors, a position that is expected to be maintained next year.
Business confidence in the Construction sector
The Business Confidence Index for Construction plunged in Q4 2024, falling from +25.3 in the previous quarter when it was the most optimistic sector, to just +0.2. While the index is in line with the national average, it is below the historical average for the sector (+3.8) and is now among the least confident sectors after experiencing the largest fall in sentiment across all sectors surveyed.
Sentiment had been running high in Construction following the election of a new UK Government that marked housebuilding and planning reform as key planks in its aim to boost UK economic growth, alongside the easing of the considerable headwinds that the sector had been facing, including high interest rates and materials costs. However, the Autumn Budget included additional costs for businesses, while signs of returning inflationary pressures could slow the rate at which interest rates will fall over the course of the year, potentially dampening demand in the sector. However, the main concern for businesses in the sector is around regulation, with companies facing delays due to hold-ups in the planning system and with additional environmental and fire safety requirements. The supply of labour is also an ongoing concern. As a result, output in the sector is faltering. Recent ONS statistics show that construction output fell by 0.4% in October 2024, following a small increase of just 0.1% in September. However, the 2024 Q4 Bank of England Agents’ Summary of Business Conditions stated that businesses in the sector expect modest growth to return during H1 2025.
Domestic sales growth and customer demand
Against the backdrop of faltering confidence, domestic sales growth edged up slightly to 3.1% in Q3 2024, and further ahead of the sector’s historical average (2.7%). However, there was a large rise in the proportion of businesses reporting customer demand as a growing challenge, rising from 32% in the previous quarter to 43% in Q4 2024. Construction companies have adjusted their expectations for sales growth in the year ahead as a result and now project domestic sales growth of 4.6% in the coming 12 months, compared to the projection of 6.1% in the previous quarter. The forecast growth is lower than the economy-wide projection of 4.9% for domestic sales growth for the coming year.
Input and selling prices, and profits growth
The latest survey data suggests that the growth in inflationary pressures reported earlier in the year by Construction businesses have eased somewhat. With input prices growth having picked up in both Q2 and Q3, it nudged down in Q4 2024 to 3.9%. Department for Business and Trade construction materials price indices show that materials prices continued to edge down in October. However, the BCM survey suggests that input price inflation in Construction remains above the national average (3.7%) and despite an expectation that they will ease further in the year ahead, the 3.1% projection is the joint-highest alongside IT & Communications.
Likely a reflection of the uptick in input price growth reported in previous quarters, selling price inflation in the Construction sector increased to 2.6% in Q4 2024, up from 1.4% in Q3 2024. As input price and salary growth continue to ease over the coming year, businesses plan to raise prices by 2.1%, still much faster than the historical average of 1.4%, but broadly in line with the economy-wide projection (2.2%).
Construction businesses reported stronger profits growth in the latest quarter, rising to 3.8% from just 1.2% in Q3 2024 and the highest growth reported since Q1 2023. Companies expect to broadly maintain that rate of growth, with 3.7% projected for next year, above the historical average of 2.4% but weaker than anticipated across most other sectors, apart from Transport & Storage. The relatively weak expectation likely reflects the softer sales outlook and higher inflationary pressures forecast for the sector.
Employment and labour market challenges
Amid ongoing labour market challenges in the Construction sector, employment growth picked up in Q4 2024. At 1.5%, growth exceeded the sector’s historical average (1.2%) and was close to the national average (1.7%) after reporting growth of just 0.5% in Q3 2024. However, a large proportion of Construction businesses continue to report the availability of non-management skills as a growing challenge, with 27% citing the issue in Q4 2024, the largest proportion of any sector. Skills supply issues were also cited by the 2024 Q4 Bank of England Agents’ Summary of Business Conditions, with tight labour availability flagged as one potential limiting factor on future output growth. Despite these concerns, Construction businesses plan to maintain employment growth at 1.6% next year, compared to growth of 1.9% expected nationally.
Rising labour demand may have directly impacted salary growth which, having eased in successive quarters throughout 2024, rose to 3.2% in Q4 2024, significantly above the historical average for the sector (2.1%) but broadly consistent with the economy-wide average (3.1%). This trend is expected to continue next year, with salary growth easing to 2.7%, matching the national average.
Business challenges
The latest survey shows that the Construction sector faces three significant growing challenges in Q4 2024, with the tax burden, regulation and customer demand each cited by more than 40% of businesses in the sector. Skills availability, particularly non-management skills, also remains an ongoing challenge for the sector.
The business tax rises announced in the Autumn Budget meant that the tax burden was cited by 46% of companies in the sector, the largest proportion ever recorded in the survey and above the national average (40%). Only the Energy, Water & Mining sector reported the tax burden as a greater challenge (49%). However, concerns about regulatory requirements rose further and remain the most widespread concern for the Construction sector, reported by half (50%) of companies as a rising challenge in Q4 2024, matching the historical high for the sector and ahead of the national average (40%). Customer demand was reported by 43% of businesses as a growing concern in Q4 2024, with the issue only reported by a greater proportion of businesses in the Retail & Wholesale sector (51%).
Investment growth
Construction again recorded the weakest capital investment growth of any UK sector in the year to Q4 2024. At 1.4%, investment growth increased compared to the 1.1% growth reported in Q3 2024 but lagged the economy-wide average of 2.6%. The slump in confidence in the sector also appears to have impacted investment plans for the year ahead, with companies in the sector expecting the lowest capital investment growth over the coming 12 months at just 0.6%, which is weaker than projected last quarter and is less than half the historical average rate for Construction (1.6%).
The growth in R&D budgets improved compared to the previous quarter and, at 1.8%, was ahead of the national average (1.6%). However, businesses do not plan to maintain that level of growth and expect budgets to expand by just 1.0% in the year ahead, close to the sector’s historical average (1.1%).