The latest national Business Confidence Monitor (BCM) for Q3 2024 shows a slight drop in sentiment. However, confidence remains high as businesses continue to expect sales and profits growth to improve significantly in the year ahead.
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 15 July to 20 September 2024.
- The Business Confidence Index for Construction rose again in Q3 2024 to its highest point since Q4 2021 and it is now the most confident of all sectors surveyed.
- The rise in confidence was underpinned by a pick-up in domestic sales and optimism that lower interest rates and government policy will boost demand.
- However, input cost inflation remains elevated and businesses appear to be limiting the growth in their selling prices, impacting the rate of profits growth.
- Employment growth also slowed amid growing concern about the availability of skills, but businesses are optimistic that recruitment will increase in the year ahead.
- Regulatory requirements remain the main challenge for the sector as concern about customer demand has fallen.
- Investment conditions appear to remain difficult for the sector and, while businesses plan only modest growth in R&D budgets, their outlook for capital investment is more upbeat.
Business confidence in the Construction sector
The Business Confidence Index for Construction edged up again in the latest quarter reaching +25.3, its highest level since Q4 2021 and the fourth consecutive rise in the Index. It is now comfortably above the national average (+14.4) and its historical sector average (+3.8). Businesses in Construction are now the most confident of all UK sectors, ahead of Banking, Finance & Insurance (+21.8) and IT & Communications (+21.3).
Confidence in the sector has likely been buoyed by the government consultation on planning reforms and new higher housebuilding targets alongside recent and expected future cuts in interest rates. Recent ONS statistics show that construction output grew by 0.4% in August 2024, following a fall of 0.4% in July. This continues the stop-start pattern of activity in the sector. However, output is estimated to have grown by 1.0% in the three months to August 2024, with the increase driven by new work, with output in repair and maintenance flat. Amid the strong confidence reported in the latest BCM, the Q3 2024 Bank of England Agents’ summary report of business conditions stated that businesses in the sector continue to cite the high interest rate environment, elevated building costs, labour shortages and planning delays as constraints to growth.
Domestic sales growth and customer demand
Against the backdrop of high confidence, domestic sales growth rose to 2.8% in Q3 2024, edging ahead of the sector's historical average (2.7%) and the rate reported in the previous quarter (2.3%). As concerns about customer demand eased considerably, Construction businesses now project domestic sales growth of 6.6% in the coming 12 months, well ahead of the sector-wide projection of 5.1%. Indeed, the proportion of businesses reporting customer demand as a growing challenge fell to 32% in Q3 2024, dipping below the historical average (42%) and the lowest proportion citing the issue since Q2 2022.
Input and selling prices, and profits growth
The latest survey provided further evidence that elevated building costs remain an issue for the industry. Input price inflation climbed for the second consecutive quarter in Q3 2024, reaching 4.6%, the joint-highest rise of all sectors in the UK economy. Construction businesses expect input price growth to slow significantly in the coming year and dip below the historical average (3.1%), with a projected increase of 1.8%. This is also below the 2.4% rise projected for the UK as a whole.
As input price inflation edged up in the Construction sector, businesses continued to ease the growth in their selling prices in the year to Q3 2024, to 1.4%, matching the sector’s historical average. This rate of increase is among the lowest price rises in the UK, only above the Energy, Water & Mining sector, which saw no change in prices. Companies anticipate that the rate of price expansion will increase marginally over the next 12 months to 1.8%, however, this is slightly below the 2.2% rise projected nationally.
Despite the pick-up in domestic sales growth, rising input costs and weak selling price rises appear to have impacted profits growth, which deteriorated from the previous quarter to just 1.2% in the year to Q3 2024. This was just over half the sector’s historical average of 2.3%. However, with CPI inflation now back to more manageable levels and the government promising significant building reforms, Construction companies expect a significant uplift in profits growth over the coming year, to 6.2%. This rise is among the highest projected increases of any sector in the UK – only the IT & Communications sector anticipates a stronger rise of 7.3% – outpacing the UK average expectation of 5.1%.
Employment and labour market challenges
Employment growth slumped for the second consecutive quarter in the Construction sector, as staff levels only increased by 0.5%. This rise was the weakest of all sectors and less than half the sector’s historical average of 1.2%.
This slowdown in employment growth is likely linked to the increase in labour market challenges experienced by businesses in Construction compared to the previous quarter. There was a significant uplift in the proportion of companies citing the availability of management skills (21%) and non-management skills (31%) in Q3 2024, with the latter concern more prominent in Construction than any other sector in the UK economy. With these challenges arising again, it appears that the sector is still encountering significant skills shortages in the wake of Brexit and the post-Covid rise in economic inactivity. Despite these concerns, Construction businesses expect to meet the projected rise in demand by raising the rate of recruitment, and plan to lift employment growth to 1.8% next year, however, this will still lag behind the 2.1% growth expected nationally.
Relatively sluggish employment growth translated into comparatively weak wage growth for the Construction sector, at just 2.5% in Q3 2024. While this is above the sector’s 2.0% historical average, it was the lowest expansion of any sector, lagging the national average growth rate of 3.6%. Despite the anticipated uplift in employment growth, companies expect to raise salaries at a similar rate over the next 12 months, with the 2.4% projected growth only stronger than the rise forecast by businesses in the Property sector.
Business challenges
Regulatory requirements remain the most widespread concern for the Construction sector, reported by 44% of companies as a rising challenge in Q3 2024, a similar proportion to the previous quarter. This concern remains close to the historical high for the sector (50%) and ahead of the national average (40%).
While the proportion of companies citing customer demand as a growing concern dropped significantly in Q3 2024, it is now the joint-second most widespread concern beside competition in the marketplace (32%). Alongside the rise in businesses reporting challenges associated with skills shortages, the proportion of companies reporting the tax burden as a growing challenge remained elevated at 30%, nearly double the sector’s historical average and in line with the economy-wide average (29%).
Investment growth
The Construction sector recorded the weakest capital investment growth of any UK sector in the year to Q3 2024, at just 1.1%. Difficulty in accessing capital is likely a key contributor to this comparatively sluggish expansion, with one in five (20%) businesses in the sector reporting access to capital as a growing concern, the highest proportion across all sectors. However, businesses appear more optimistic about investment prospects and plan to increase capital investment by 1.8% next year, above the 1.6% historical average.
At the same time, the sector also recorded the lowest increase in R&D budgets of any sector in the UK economy at just 0.1%. This was the weakest rise since Q1 2012 and significantly below the 1.1% historical average. While a modest improvement is forecast for the coming year, the 0.7% anticipated increase is lower than both the historical average and the growth projected nationally.
