Bounceback for UK Construction as sector poised for post-2024 recovery despite economic and geopolitical challenges

The UK construction sector is set to experience a modest decline in activity in 2024, with a return to growth expected in 2025, according to the latest analysis from PwC. This forecast, outlined in PwC’s Construction Outlook 2004 report and framed against the ongoing geopolitical and economic challenges, highlights the sector's resilience.

The new report shows:

• Residential output continues to be the most negatively impacted New Build segment, while infrastructure continues to be most resilient. However despite challenges posed by high interest rates and the discontinuation of the Help to Buy scheme, opportunities for growth are emerging through alternative housing tenures and the potential for government incentives.

• Repair & Maintenance output is expected to be more impacted than new build activity in 2024 as impact on consumer finances bites. Beyond 2024, all segments are expected to return to growth and the medium-term outlook for R&M spend is positive, driven by continued safety remediation activities and retrofit of energy saving measures in residential dwellings.

• An increase in insolvencies highlights the financial pressures and challenges faced by the sector, including difficulties in obtaining performance bonds and credit limits due to inflation and reduced project starts.

Paul Sloman, Engineering and Construction sector leader at PwC, commented on the findings: 

"The resilience of the UK construction sector in the face of significant economic and geopolitical headwinds is positive. While we anticipate a temporary contraction in 2024, the outlook for 2025 is promising. This rebound is a testament to the sector's adaptability and the evolving landscape of opportunities, from new build projects to innovative housing solutions. Despite the challenges, the sector's ability to navigate through these times is a positive indicator of its long-term growth and sustainability."

According to the report, the upcoming year is set to witness a substantial shift in the UK construction sector, with spending transitioning from repair and maintenance (R&M) activities to new builds. Historically, R&M spend has been more resilient during economic downturns, demonstrating a steadier demand. However, the current economic climate, marked by higher borrowing costs is reshaping spending patterns. This shift could signal a reorientation in the industry's focus, prioritising new construction projects over maintenance and repair work, reflecting both a response to consumer demand and a strategic adaptation to the evolving economic landscape.

The residential sector, particularly new build residential output, remains the most adversely affected segment in the UK construction industry. The sector faced a sharp decline due to the compounded impact of high interest rates, which have made mortgages more expensive and home buying less accessible. Additionally, the discontinuation of the Help to Buy scheme has removed a crucial support mechanism for new homeowners. Despite these challenges, there are emerging opportunities for growth. Alternative housing tenures, such as affordable housing schemes and private rentals, are gaining traction. Moreover, there is potential for new government incentives, particularly in the lead-up to the general election. These incentives could provide a much-needed boost to the sector, stimulating demand and encouraging new developments.

The construction sector is also experiencing an uptick in insolvencies, highlighting the mounting financial pressures and challenges faced by the industry. This trend is particularly pronounced among mid-sized contractors and developers, strained by inflation and a downturn in new project starts. This has been exacerbated by difficulties in securing performance bonds and credit limits, as financial institutions become increasingly cautious in the face of market instability. The increase in insolvencies reflects a broader issue of liquidity and financial health within the industry, with firms adapting to a more cautious and strategic approach to financial management and project planning.

Paul Sloman, added:

"We're seeing a notable move from repair and maintenance to new builds, largely driven by the current economic climate. The residential sector, especially new builds, faces pressure from high interest rates and policy changes, yet there's potential for growth through innovative housing solutions and possible government initiatives. Moreover, the rise in insolvencies in the industry underscores the need for robust financial strategies. It's a pivotal time for the sector, which is demanding adaptability and resilience; however the future does look bright for the coming year."