Written by Kunal Sawhney, CEO, Kalkine
UK’s economic growth posted a sharp drop in the month of February; as per the Office for National Statistics (ONS), data, the economy expanded by 0.1 per cent compared with 0.8 per cent in January. While the Services, with a growth of 0.2 per cent became the prime contributor to the growth, production witnessed a decline of 0.6 per cent and construction, a fall of 0.1 per cent was the major drag on the Gross domestic product (GDP).
Construction and economic growth
Construction growth declined by 0.1 per cent from an increase of 1.6 per cent in January 2022. The decline in monthly construction output was led by a sharp fall of 0.5 per cent in repair and maintenance activities, while the new work also could not keep up with the pace and increased by a modest 0.1 per cent.
Construction activities during the month were also impacted by storms witnessed by the country from 16 to 21 February. Out of the nine sectors, six saw a decline, with infrastructure new work emerging as the major drag, falling for the sixth month in the last seven.
However, the positive thing is that construction output in February is now 1.1 per cent above its pre-coronavirus level. And for the three months period to February 2022, construction output has risen by 2.4 per cent, when compared with the prior three months of September to November 2021. On a quarterly basis, new work and repair and maintenance were the main contributors, while seven of the nine sectors saw an increase at the sector level. Private new housing and non-housing repair and maintenance let to the output growth for the three months to February.
What has been ailing the construction sector?
While many of the firms have termed storms Dudley, Eunice, and Franklin as the reason for the construction output decline during the month of February, as the projects were delayed due to loss of working days, there are reasons beyond that; smaller firms are still facing difficulty in sourcing construction products.
The UK has witnessed a huge rise in material costs in the last two years, which has now aggravated due to the record-high inflation and supply chain disruption due to the Russia-Ukraine war. As per the Materials Cost Index of Building Cost Information Service (BCIS), raw material cost for construction has almost trebled in 2022.
The covid-19 induced supply chain disruptions, which led to unprecedented shortages of raw materials, resulted in a sharp rise in prices, and complicated the Brexit situation. Labor shortages also evolved and pushed the already high cost of construction.
There has been a sudden increase in demand for commodities such as iron, copper, cement etc., amid soaring energy prices that have pushed up construction input prices, while the major construction firms are finding it difficult to pass through costs to consumers amid the rising inflation and cost of living crisis. The recent reports from International Construction costs, have put London on the top spot as the costliest city to build in.
The road ahead for the sector
There has been a decline in construction output during February; however, demand continues to be strong for the sector. Data from the ONS has shown that new orders in the construction industry grew by 9.2 per cent in the final quarter of 2021 (October to December) compared with the third quarter of 2021 (July to September). There has been a continued rise in total orders, with commercial projects keeping the momentum up for the sector. Though there is some decline in confidence about the growth outlook and caution creeping into spending decisions, the near-term outlook remains strong for the construction sector with robust demand in place and all sub-sectors recovering to above their pre-coronavirus level.