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Construction Output

17
Nov

By Aquila Forensics

Construction Output Bulletin – November 2021

On 11 November 2021, the Office for National Statistics (ONS) released its monthly update on the construction industry. Recovery and improvement are now becoming more evident in the aftermath of the pandemic, but equally there are still areas where the industry is showing slower signs of progress as the pandemic’s full effect continues to unravel.

The ONS report recorded that quarterly construction output fell 1.5% in Q3 (July – September 2021) compared to the previous quarter, and for the first time since Q2 in 2020. New work decreased by 0.3% and overall total construction new orders fell 9.2% in the same quarter. Anecdotal responses gleaned by the Monthly Business Survey for Construction and allied trades suggested that the reasons for this were because of rising prices of raw materials such as steel, concrete, timber, and glass, along with the difficulty in sourcing such materials for projects. Supply chain issues also contributed and even though order books were healthy, the availability of certain construction products was affecting projects currently underway.

Amid the gloom, however, September 2021 showed a construction output increase (in volume terms) of 1.3%, when compared with the previous month. This is also one of the highest rises since March 2021 (when it increased by 4.8%), and the first increase since June 2021. This is a positive sign which hopefully marks a turning point for the industry. Confidence is gradually returning to the market, driven by increases in both public and private new housing (evidenced by new housing orders which grew 5.3% in Q3 2021). Overall, the Construction Output Price Indices (OPI) for new construction work grew 5.5% in the year to September 2021. Additionally, the annual rate of price growth increased for all new work sectors, the largest of which was new housing, which rose 7.5% (being the strongest rate of growth since records began in 2014). Private industrial new work also rose 6.3%.

Figure 1: The monthly index shows the level of construction output grew in September 2021 for the first time since June 2021
Monthly all work index, chained volume measure, seasonally adjusted, Great Britain, January 2010 to September 2021
Source: Office for National Statistics – Construction Output and Employment

Compared to the slow recovery the construction industry faced after the 2008 global financial crisis, the post-pandemic situation appears more promising, yet, both the availability and the cost of construction materials will be a major driving force behind the ability to recover faster. Aquila Forensics’ own experience on live projects is that the cost of raw materials is outstripping the published indexes in particular sectors, and there are no signs of it reducing in the near future. Shipping costs are predicted to continue to rise and impact prices, due to several reasons, including port congestion and a reduction in global shipping routes. According to a report by ING Bank, issues with capacity may only ease in 2023 when a further 2.2 million Twenty-foot Equivalent Unit (TEU) will be ready for use, representing a 6% increase in container capacity worldwide. For suppliers of lower value items who regularly use containers to distribute their goods, they could see their margins squeezed as their freight costs rise from around 5% to 20% of their sourcing costs. This level of cost increase will undoubtedly be passed on as higher material costs going forward.

Aquila Forensics has seen that where there have been increases in the cost of materials, this is typically being pushed on to subcontractors rather than clients, as a consequence of existing contracts and agreements. However, as material cost increases are likely to continue into 2022 and possibly beyond, the implications will ultimately be felt by all as contracts conclude and new agreements reflect market conditions.

Infrastructure continues to demonstrate its resilience to the long-lasting effects of the pandemic, and saw a strong increase of 10% in the three months to September 2021. Projects such as High Speed 2, motorway improvements and green energy developments may have contributed to this. Equally, a primary driver may have been a strong order book pre-pandemic but also the fact that this type of work is carried out in the open, where the introduction of socially distanced working practices is less problematic. Given that Covid-19 presents more risks to older people, it is interesting that as an industry between 1997 and 2019, there has been a noticeably greater rise in the number of hours worked in construction by those aged over 50, than those between the ages of 16 to 29. The construction industry when compared to other parts of the economy, is at greater risk from changes in working practices for the safeguarding of employees.

As material costs rise, construction firms become more incentivised to find efficiencies wherever they can. The ONS previously reported, for instance, that between 1997 and 2018, the construction industry showed a greater than 2 percentage point increase in the intermediate consumption of service firms, such as engineers and architects, specifically those involved in digital activities. By contrast the consumption of rubber and plastics reduced by close to 8%, arguably showing a continuing trend that the construction industry is increasing its spending on services and different ways of working.

25% of businesses that survived the pandemic had to change suppliers or find alternative solutions

Further, supply chain issues and the price of raw materials will not always remain as problematic as they currently are, as more and more projects are being given the green light. Evidence from Business Insights and Conditions Survey (BICS) for October 2021 shows that 25% of businesses that survived the pandemic had to change suppliers or find alternative solutions in order to source the materials, goods or services they needed to continue trading. In the last month, however, the situation remains that 10% of construction businesses were unable to source materials, goods or services from within the UK. No doubt, this landscape will continue to be volatile, due to the uncertainty of what lies ahead.


Full ONS report can be found here