Beyond the gloomy stats, the outlook for 2023 is nuanced (based on the UK market)
Courtesy: Michael Riordan - UK managing director of construction consultancy Linesight
Life is likely to be tough for construction in 2023. The sector is expected to contract by nearly 1.9 per cent during the course of the year, according to GlobalData’s report on key trends and opportunities leading up to 2026. But the picture is more nuanced. While growth in residential, commercial and industrial areas is forecast to slow sharply, ‘mission critical’ sectors such as data centres and life sciences will see continued high demand.
And while these will not be immune from the sort of issues facing the rest of the industry – including ongoing supply chain challenges – these can be mitigated by providers embarking on greater collaboration with stakeholders or entering into relationship-based supply chain management arrangements.
Downbeat forecast
The outlook for the UK economy and construction sector in 2023 is gloomy, with the Bank of England projecting that the UK economy will be in recession for a prolonged period.
General sentiment suggests that material price hyperinflation is in the rear-view mirror. We agree, and expect that for the most part prices will either continue to moderate or drop back throughout 2023; as supply chains ease, sudden hikes are unlikely.
Elsewhere, the picture is less positive. A continued shortage of labour and specialist skills, high energy prices, contractor capacity and funding challenges could create a near-perfect storm – one that could affect the viability of some operators.
Meanwhile, financial markets are reeling from the impact of global events, high inflation and rising interest rates.
The current general consensus is that the UK is in economic decline with a recovery unlikely before 2024.
The energy issue
The government’s recently announced increase in the windfall tax on the profits of oil and natural gas companies from the current level of 25 per cent to 35 per cent from January 2023 will remain in place until 2028. This could further incentivise moving away from oil and gas towards the adoption of sustainable energy strategies, such as wind and solar farms, as oil and gas strategies become less profitable. Indeed, the fourth quarter of 2022 saw a rise in approvals sought for various sustainable-energy initiatives with a combined capacity of 371+MW.
Subdued sectors
When it comes to activity, commercial, industrial and residential construction are unlikely to see much by way of growth in 2023. Commercial is likely to remain sluggish throughout the year, reflecting weak investor confidence, the increasing cost of finance and a worsening of the cost-of-living crisis, which will have an impact on demand.
While industrial activity has been booming in recent quarters, growth is expected to slow sharply in 2023, with the sector’s output affected by supply chain disruptions, soaring energy prices and uncertain global demand.
Residential has remained relatively strong in recent quarters, with output in 2022 set to grow by 6.4 per cent, but we expect to see a sharp reversal in 2023, owing to subdued demand for new housing amid rising interest rates and material prices.
Mission critical
While mission-critical sectors such as life sciences and data centres are less affected by elevated borrowing costs, other issues such as access to specialist contractors, general labour shortages and power availability remain a concern.
In addition, the pressures on long-lead equipment in the data-centre sector will continue to increase into 2023, with prolonged demand far outweighing the capacity of the supply chain.
Encouragingly, there has been growth in the development of tier two and tier three suppliers to support this demand. However, market entry remains a significant challenge, with suppliers reporting fully booked capacity until the second quarter of 2024.
Strategies for success
Addressing this capacity issue can be achieved by adopting procurement strategies that share the burden of extended lead times and maintain lines of communication between operators, contractors and suppliers.
The current outlook suggests turbulent times ahead for construction. It is crucial to mitigate the array of challenges by promoting relationship-based supply chain management and providing an elevated level of value engineering together with in-depth risk analysis and schedule management. Such approaches will be vital to delivering cost and programme certainty.