Sink or swim for construction as Red Sea crisis set to disrupt future of supply chain, says RSM

12 January 2024

In November 2023, the volume of monthly construction output decreased 0.2%, continuing the downward trend from October (0.4%). The decrease in monthly output came solely from a decrease in new work (2%). 

In addition, the main sector contributors to the monthly decrease were private new housing and infrastructure new work, which decreased 3.9% and 2% respectively. Construction output also saw a decrease of 0.6% in the three months to November 2023; due to a 3.6% decrease in new work. 

Commenting on the construction output data Stacy Eden, partner and national head of real estate and construction at RSM UK, said: ‘November’s decrease in output reflects sentiment on the ground as conditions remain tough for construction businesses, after a year of contraction in the housing market (with housing transactions 20% below the pre-pandemic average) and disruption to infrastructure projects. As main contract awards continue to fall, the pipeline of work is depleting, meaning margins are incredibly tight. Clarity is therefore needed from government on its plans for infrastructure spend, as this is currently dampening business confidence and adding to skills, retention and productivity issues. Productivity is also currently impacted by the Red Sea crisis and the delayed shipment of materials, which will cause further disruption to the supply chain in Q1 2024 and runs the risk of bringing back inflation. 

‘With the upcoming Spring Statement, the government has an opportunity to address infrastructure spend to restimulate the market by setting out its intentions to reutilise HS2 sites for affordable housing, in line with national housing targets. However, infrastructure projects take time to procure and mobilise, so this needs to be prioritised and now seems like the optimal time after recent sharp falls in mortgage rates. The industry also requires supply chain restructuring to address productivity and skills challenges. While this has been partly resolved by government investment in manufacturing and technology in the Autumn Statement, a more focused policy for construction in the Spring Statement would be a welcome move, coupled with a potential reduction in SDLT to increase liquidity in the housing market.’  

Thomas Pugh, economist at RSM UK, added: ‘Looking ahead, there are reasons for the construction industry to be optimistic in 2024. Now that attention has firmly turned towards when interest rates will start to be cut, mortgage rates have fallen sharply over the last three weeks. That will help to stabilise house prices, which are now probably at or near their nadir. A gradual recovery in the housing market will help to stimulate housing construction. In addition, an economic recovery in the second half of this year should support an improvement in commercial activity.’