For the February/March issue of Demolition Hub, Terry Lloyd, Head of Vendor in the SME Lending Division at Paragon Bank shares his thoughts on what 2024 has in store for the construction industry. 

Last year was challenging for the economy, particularly the construction sector. Businesses endured rocketing levels of inflation, soaring interest rates, continuing supply chain issues, cancelled orders and the failure of clients.

The era of cheap funding costs certainly came to an abrupt end, impacting all areas of the economy. With the Bank of England raising the Bank Base Rate steadily throughout 2022 and 2023 to its current level of 5.25%, it was a significant increase from the 0.1% to 0.75% range it had been for 13 years between March 2009 and May 2022[1].

Borrowing costs were understandably an area of concern for construction firms that rely on high asset utilisation. It also impacted the funding costs of their clients and, in some cases, the viability of proposed schemes.

The reasons behind the Base Rate hike are well-trodden. The Bank needed to dampen inflation to its 2% long-term target after it soared following the COVID-19 pandemic, exacerbated by rising fuel prices across the world.

This combined with high labour costs, building materials and spiralling mortgage rates for consumers, resulted in a slowdown in homebuilding, further impacting the construction industry. Additionally, commercial schemes slowed or were mothballed altogether.

Recent housing statistics data released by Homes England in December 2023 revealed a 23% decrease in new home starts in between April and September compared with the same period in the previous year[2]. Of the homes started on site in this period, 86% were for affordable homes, which also saw a decrease of 10%[3].

Furthermore, the construction industry overall has also been affected, with recent data released in October 2023 by the Office for National Statistics (ONS), which showed that overall new work had decreased by 4.6% in October 2023, in comparison to October 2022[4]. With public new housing, private new housing and private industrial new work, all down from the previous year[5]. However, it’s also important to note that overall, all work is up 1.1%[6], which although is a small amount, is nonetheless a promising sign.

Looking forward to this year, there seems to be a renewed sense of optimism. The Bank has held the Base Rate since September 2023, giving businesses and consumers some much-needed breathing space, whilst the financial markets think rates could start to come down sooner than anticipated.  

Whilst we can't be certain about what the Bank of England will decide at the next review, the economic signs generally are more positive. Despite being some way off the 2% inflation target set by the Government, encouraging signs were seen at the end of 2023. The latest CPI inflation figures, released in December, revealed a drop of 0.7 percentage points to 3.9% in November 2023, down from 4.6% in October.

Furthermore, the Office for Budget Responsibility (OBR) updated its inflation forecast for the coming years and estimated that inflation will reduce to 2.8% by the end of 2024[7].

For the construction industry, this is welcome news. A key topic in the past year for our clients in the sector has been interest rates and how they impact business decisions. In a high inflation, high interest rate environment, it is more difficult for firms to make investment decisions with certainty.

Businesses thrive on stability; it enables them to make decisions with more clarity and to progress investment decisions with greater levels of confidence.

For those in the construction industry, we should see a positive impact, and importantly so for those businesses that are looking to finance equipment or machinery. If the Base rate stabilises this should in turn enable businesses to borrow at lower rates, making it more affordable for them to purchase or lease equipment that is essential to the growth and success of their business.

This article was first published in Demolition Hub.

[1] Interest rates and Bank Rate | Bank of England

[2] Housing_Statistics_December_2023.pdf (publishing.service.gov.uk)  P10

[3] Housing_Statistics_December_2023.pdf (publishing.service.gov.uk) P10

[4]Construction output in Great Britain, volume, seasonally adjusted growth rates, £ million and percentage change Table 5a

[5] Construction output in Great Britain, volume, seasonally adjusted growth rates, £ million and percentage change Table 5a - Output in the construction industry - Office for National Statistics

[6] Construction output in Great Britain, volume, seasonally adjusted growth rates, £ million and percentage change Table 5a - Output in the construction industry - Office for National Statistics

[7] November 2023 Economic and fiscal outlook – charts and tables: Executive summary - Economic and fiscal outlook – November 2023 - Office for Budget Responsibility (obr.uk)