Chief Exec’s report Q3 2023
6 minute read
So, our welcome, maybe unexpected, run of nine consecutive quarters of order growth has come to an end, leaving us with the question of whether the UK’s steeply rising interest rate has brought a chilly economic wind, or more optimistically that we are merely experiencing a seasonal blip?
Maybe it’s both.
Feedback from our members serving the construction industry tell us that it has slowed, with housebuilding especially moving back to cautious scheduling given the impact interest rate rises have made. More broadly, as a capital-intensive sector, any situation where the cost of borrowing has starkly increased will bring pressure, and so a calming and cooling of those rates would be welcome sooner rather than later, particularly by our steel fabricators who felt the impact of this the most.
The conversation on our pre/post-covid levels of holiday activity impacting orders has played out something like this: “It’s been so long since we had a normal holiday season with people actually taking time off in the summer, I had to stop and remind myself that I always worried when orders slowed down at the end of June and through July, and sure enough watched them return in September”. It’s a plausible explanation, and one that as an optimist I want to believe, but are we just ignoring the Stockdale Paradox, or more plainly failing to confront the brutal reality?
In the six years running from 2014 to the start of the pandemic, for each of those years the September order intake in our survey was negative with respect to the June order number, and for each of those years it was also the largest fall between any of the successive quarters for order intake. These June to September transitions also hold the top two largest decline of any quarterly transition of orders in the period, so there is reasonable support to say that there is an inherent order tail off when lots of us stop for an annual break.
It’s a view that’s backed by the forecasts for the coming quarter’s order intake and output, and reflected in the overall optimism scored now at the end of current quarter, but as ever it’s important to remember that order and output reductions are concerning for many, and key to separate any seasonal impact from the longer-term impact from interest rates. Nothing exists in isolation, and those order deficits still sit alongside other difficult business factors. In this survey, 73% of industry cited increased labour costs as continuing to drive up costs in the last quarter, and material pricing issues clearly haven’t gone away, with 72% impacted by these increases in the same period. Finally, energy remains a significant concern with autumn now upon us, and in this last quarter 69% of our survey experienced increased costs for their energy despite the overall fall in wholesale pricing.
Looking forward, an important index from this quarter shows that plans for capital investment have been on an increasing trend for the last eighteen months, with a net 24% of companies planning an increased level of investment in this area. We asked our members a specific question in this survey around what would help drive business growth in the longer term? Just over half (53% and 56% respectively) stated two equally important drivers: Upskilling staff through training investment; and increased investment in capital equipment and machinery. 41% outlined the need to develop new product lines, and around one third (36% and 33%) outlined investment in innovation and technologies and identifying new export markets respectively.
Those top two focus areas of capital investment and training would be the eyes closed answer for priority from most people in industry, and at a net positive 24% and 25% plan to increase, there is clearly intention to address this. Both are however less than half the 50% for what businesses identified would drive growth, so any government looking for the answer to kickstart our sluggish economic growth need look no further for where to help.