EP 151

Financial Forecasting: A Construction Economist reviews 2023 and explains where we are heading in 2024. (EP 151)



This week, Paul is joined in the studio by Noble Francis, Economics Director at the Construction Products Association, PhD in Applied Econometrics and Honorary Professor at the Bartlett School of Sustainable Construction, UCL.

Noble has been making waves in the industry with his easily digestible insights into market indicators such as brick deliveries and mortgage approvals. His posts provide followers with invaluable perspectives, offering genuine insights into the trajectory of the construction market. 

In this compelling conversation, Paul brings Noble’s insightful posts to life, creating an engaging dialogue reflecting on the events of 2023. Together, they peer into the future, navigating the landscape of 2024 and delving into the identified risks and opportunities that lie ahead. 


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I’ve shared a link to the eBook: Why Main Contractors seriously need a Tender Strategy.


Paul Heming: Hello and welcome to episode 151 of the Own the Build podcast with me, Paul Heming. Today I am sharing an eBook I wrote recently about creating a tender strategy for procurement at main contracting organizations. 2024, in my view, is set to be a challenging year for main contractors, specifically in and around the labor shortage, which you’re seeing in both blue and white collar workers. I really think that main contractors need a strategy to defend against this early, and I have written the eBook to outline how and why I think you can do that. In the studio today, and we’ll probably get onto this topic, which is why I’m sharing that eBook today, I am joined by Noble Francis, who is economics director at the Construction Products Association. He has a PhD in Applied Economic Tricks and he is an honorary, he’s smirking at me, honorary professor at the Bartlett School of Sustainable Construction, UCL. And I will say this, he is a man who has created quite a following on LinkedIn by posting a lot about kind of like the key metrics, if you like, in and around the industry. I’ve been trying to speak to him for I can’t tell you how long guys, but I have finally done it. Noble, welcome to own the Build. How are you?

Noble Francis: I’m very good. Thanks Paul. And thanks for inviting me on your podcast. It’s been quite a while.

Paul Heming: When do you think I first invited you on your podcast? I haven’t checked, but I think it would’ve been a year or two ago, wouldn’t it?

Noble Francis: I think it’s 18 months ago.

Paul Heming: I finally tracked you down though, didn’t I? You weren’t gonna get away from me.

Noble Francis: Indeed, indeed.

Paul Heming: So at the top of these shows, like I said, I’m really genuinely excited and I’m really pleased that you’re here. At the top of the show, what we always do is invite our guests just to talk about their experience. I’ve done a little bit of that, of course myself, but just talk about your journey and why you are now in construction and talking about the economics of it.

Noble Francis: Okay. Unlike most of your interviewees, I come from a slightly different perspective. My degree Master’s and PhD are in economics. I’m an economist by nature. I’m used to doing computer models that really bore people to death. But around 20 years ago, I started working on a few projects that were construction related. And most of my projects were across all industry sectors, whether it be manufacturing, whether it be retail. And what’s fascinating about construction is that we treat it as though it’s one industry, but as you well know, it’s not. If you’re in house building, then it’s very different to if you’re in infrastructure roads, which is very different to if you’re doing a commercial tower. So it’s a multitude of industries really, and it’s quite dysfunctional in some ways, many ways.

Paul Heming: Dysfunctional? Yeah, I was gonna say –

Noble Francis: Interesting is what we technically say. And because of that, it’s scenario that I wanted to focus in. So from going 20 years ago to working on a few projects that were construction related, I ended up working at the Construction Products Association, where we do research into various different areas of the construction supply chain, but we are looking at all areas of construction and our primary area of interest is doing forecasts for the construction industry. So a lot of companies are interested in, they know what they’re doing at the moment. They know how they’re doing as a company. What they want to know is how are other companies in the sector doing? How are companies in other sectors doing, where are the opportunities, where are the risks? But also what’s coming down the line. Most of the contractors I speak to, they know what their order book is for the next 12, 18 months, but beyond that, they don’t know. And given that there’s a lot of uncertainty and volatility, then being able to explain that to contractors and major house builders, it’s a challenge. It’s interesting, but it’s very difficult because we’re in an industry where everybody knows your [inaudible] and your skis and your ki at this world or in the house building side, everybody knows your Barkley and your Persimmon, but 86 per percent of construction employment is in the SMEs. It’s in the small specialist subcontractors.

Paul Heming: So, are you writing, and is the Construction Products Association there for the SMEs, are you there for both or are you kind of just trying to explain that what you are passionate about is obviously sharing data that is useful to everyone, but it helps the SMEs reach a wider knowledge base than they currently have in house. Like could you just talk about that?

Noble Francis: Yeah, it’s a good question. We’re a trade association, so we’re funded by construction product manufacturers, so firms that make bricks, steel, glass, lighting, heating, ventilating, anything and everything that goes into construction. So we have three key areas, which are sustainability, technical regulations and standards. And then my team, which is an economics team. There’s a trade association for every single construction product. There’s a trade association for main contractors, for SMEs, for consultants, for architects. There are trade associations for literally everything within construction and in other industry sectors. There are over 300 in construction, but we’re quite lucky in that we have the resource to have an economics team. And so what we do is market intelligence. We monitor what’s occurring in everything within construction, but also related sectors. So the housing market, for instance. And we do forecast for the UK economy as well. Now we do those primarily for members. So construction product manufacturers, whether they be multi-billion pound global corporates or whether they’re just have a company of four people. But as well as trying to help our members, I do try to make an effort to help the wider supply chain. One of the things you notice about construction is that everybody’s busy doing the day job. And you hear lots of headlines about the housing market, about house building, about construction, but media cover construction relatively poorly. When I started this job, most of the national newspapers had a construction journalist, had a housing journalist. Now they tend to just have a business journalist and they will have a housing person, but they’re not a house building person. They’re more a house prices person, really.

Paul Heming: Yeah. Okay. No, I mean it’s really interesting because, and I think when we spoke before, you were telling me that and I’ll obviously share your LinkedIn on the show notes and you were explaining, cause one of the reasons, I can’t remember when we first connected or how we first connected, but it probably was that I saw one of your posts and those posts, I’m guessing you didn’t want an annoying podcast host to see them and say, come on, let’s talk about this. But the inspiration, you kind of talked to me about it is that, you know, you’ve shared with me a recent report, which is in the hundreds of pages, right? And I guess that’s the detail that you go into to create this knowledge and these market indicators, etcetera. Why do you do those posts? Like what do you get out of it?

Noble Francis: Okay, well, I’ll start with the forecasts since you mentioned it, which is our forecast. We do them quarterly and they’re, the latest ones were about 118 pages.

Paul Heming: Brings a wide smile to your face there. Indeed. Did you do all one 18 pages?

Noble Francis: Sadly not myself. We do have a team that works on them and I have a head of construction research and she’s very good who heads up the construction forecasts. But the point I was going to make is that some people work for organizations where they have whole teams dealing with analysis of what’s happening with the market. They have enough resource to be able to read 118 pages every three months because they’re interested in the detail of all the different sectors. And we do forecast for 30 different sectors. However, that’s not the majority of the industry. The majority of the industry are working small, medium sized companies or they’re working at a big company, but they’re working on big projects. So they are so busy doing the day job. They don’t have time to read 118 pages every three months. They don’t even have time to read the 10, 15 pages that may be one sector relevant to that. What they want to know is what’s occurring now, what’s likely to happen. They want it in a quick, easy to understand format without the pretentious language, without the acronyms. What they want is the key information. And that’s especially the case in the last, I would say three, four years. If you go back to almost 10 years ago, 2014, 2015, 2016, things were relatively stable. The sector was growing, most of the construction sectors were growing and there wasn’t that much interest in our forecast, quite frankly, because everybody’s too busy enjoying the groups –

Paul Heming: Post pandemic, the world has changed.

Noble Francis: Indeed. Post pandemic, the world has changed indeed and not just due to the pandemic, but we’ve had a number of major disruptions. And so what it means is that you couldn’t just rely on what was occurring last year plus a bit the number of contracts, the value of contracts. You need to be able to understand the distortions and you are either on a board of directors and you need to be able to understand these issues for the short term with the risks and uncertainties for the long term for your strategy or you’re not on the board of directors, but you are feeding into the board of directors, if it’s a big company. If it’s a small company or you’re self-employed, you want enough information that tells you what you need to know and you don’t have time for the 99% of noise that’s out there. And that is essentially why you go into doing the LinkedIn posts or the Twitter things I do because it’s a quick, easy way of getting information to people that doesn’t involve you wasting lots of time.

Paul Heming: Yeah. And it’s so simple and digestible to understand that I always read them all. I always use them as a barometer for kind of where we’re at. I use them in conversations that I’m then having with clients. And you talked a little bit earlier about the quality of construction or housing specific journalism in terms of the mainstream media and how it’s reported. And there’s been a dilution in the housing journalism or construction specific journalism. A couple of the things that really stand out to me about the post that you do, Noble, in terms of the simplicity of them are that you talk about very or you highlight and analyze very simple things. Things like mortgage approvals, UK brick deliveries. There’s certain things that you draw out as metrics for where we are at as the industry. And just as an example, you always talk about the correlation between UK brick deliveries and house building being like almost like a de facto KPI for how the industry or how the economy is going. Could you just talk about that as an example?

Noble Francis: Okay. The brick deliveries as a proxy variable for housing starts is an interesting one because I’m trying to do two things there. Firstly, housing starts data are available, but they’re quarterly. Secondly, housing starts data are highly distorted when you have things like building regs changes. And so when you get a major up rating in the building regulations that occurred a year ago, but with 12 month grace period, then you can find that house builders do the absolute minimum necessary to start a property.

Paul Heming: Yeah.

Noble Francis: Yeah. To get ahead of the building regs changes so that they can build out over the next few years under the old building bricks. The problem is that means that the housing starts, figures aren’t that useful for anybody, whether you are a product manufacturer that feeds into products that would usually be used in starts, whether it’s pipes for groundworks, whether it’s bricks, whether it’s builder’s merchant who’s feeding in to early house building starts, whether you are a small specialist subcontractor. So what you need is something that is an early indicator that is firstly monthly, not quarterly. And secondly, you need something that reflects what’s actually occurring down on the ground.

Paul Heming: Why do you need that? Like, so what does it give to “the reader”? So UK brick deliveries, if they’re on the rise, that means what?

Noble Francis: That means that housing starts around the rise. And it also means that with a lag of around two to three months, the main house building activity occurs. And then within another month or two, it tends to be that you are finishing off towards the completions. So if you are an electrical distributors or if you are doing roofing, you know at what point your activity is likely to occur. Now again, if you go back to 10 years ago when things were growing, albeit from a low base post financial crisis, that isn’t really so essential because you can look at the quarterly housing starts and that’s fine. The problem is since the pandemic and not solely because of the pandemic, but since the start of 2020, there have been so many distortions there that what you need is monthly data. You need early indicators, monthly data, and you need something that’s really reflective of what’s occurring down on the ground. And we can talk about some of those distortions. You already mentioned the pandemic, but there are various different distortions that we’ve seen over the last, what, three and a half years.

Paul Heming: And what would they be? It would be what, Brexit, pandemic, war in Ukraine and then kind of like the inflation on fuel price and so on or?

Noble Francis: Yes, I mean in chronological order, obviously we had the initial lockdown which occurred at the end of February 2020. And that was an enforced shutdown of the housing market and the construction industry. So it’s not that demand fell. Some macro economists will treat that period as though it’s a sharp decline in GDP recession, but it’s not, what it was is an enforced shutdown of the industry, but it’s an enforced shutdown that isn’t due to an unprecedented event. What we didn’t know at that stage is how that would affect things going forward over the next 12, 18, 24 months. So what we had to do was have a look at previous pandemics, global pandemics, but even then, if you go back to the influenza pandemic back in 1918, we didn’t have a shutdown of the industry. So being able to quickly look into the distortions is important. So we had the initial lockdown and that is an enforced shutdown of the industry. Once you get into May, June, then industry is able to operate again, but it’s not post-recession, it’s not gradually building back up because the projects are still there. So there’s a rush back to site, which is fine for contractors because they were sitting at home waiting until they could get back to site on projects that were already started. The problem is if you are a product manufacturer and you are forced to shut down during that period, restarting is not quick.

Paul Heming: Can I ask why? Because in some respects, so it’s obviously a supply and demand shock, which then caused the price of materials, for instance, to go up. But if everywhere stopped both site and factory to keep it simple and they both stopped at exactly the same time and then both restarted at exactly the same time, why did it create that demand shock?

Noble Francis: It’s a good question. It’s primarily because if you shut down a construction site in terms of number of people on there, they go home, they’re waiting for it to reopen. So you say, okay, we’re able to start next week. Everybody gets back onto site, they’re ready for it. Manufacturing is not like switching on and off a light switch. Its high fixed costs in assets that are expensive. If you’re going to shut it down, it’s a big major decision and if you’re going to reopen it, you will only reopen it if you are absolutely sure the demand is going to be there not just next week, but for the medium term. And so even preparing to make the decision, then once you’ve made the decision reopening, you have to make sure all the capital in there, all the machinery and everything is gradually reopened in a staged way to make sure that it’s fully operational without destroying anything.

Paul Heming: And I guess there would’ve been quite a lot of hesitancy going back to May, 2020 or whenever it was about opening up on full capacity given the uncertainty with that at that time is currently in place.

Noble Francis: Yes. Given that post initial lockdown, the concerns were going to be, well, what sort of recovery will we have? We might have a little burst of activity as those projects were finished, but then are we going to have a recession or are we going to have further lockdowns? And so what we were doing at that point was because we did have to publish in summer 2020, we didn’t publish forecasts as such. What we did is publish a range of scenarios based upon how quickly we get back to the new normal, whether we have lockdowns, further lockdowns. As it turned out, our central scenario was correct, which is effectively you have subsequent lockdowns primarily in the winter period, but they don’t affect construction. Construction is outdoors, it isn’t in a small confined space. You have the development of vaccines over a period of time. This all helps. What it did do though is that you ended up with productivity on some construction sites being reduced back in 2020 in areas where people are within an enclosed space. So that might be if it’s repair and maintenance within housing association blocks of apartments or if you’re on commercial towers and things like that, where you are in an enclosed space as you go up in the lift. So in 2020, we did have a return back to activity on site, but it reduced productivity in some sectors. And that’s just one of the distortions we had. Others, which you’ve sort of hit upon slightly. We had Brexit, which before we actually left the EU, we were uncertain as to the extent of disruption there was going to be because it was highly dependent on what sort of Brexit you have. It depends on whether we’re going to do full checks on imports, are there gonna be tariffs on imports, that sort of thing. As it turned out, there weren’t tariffs on imports. We still haven’t done full checks on imports of construction products or any products. So because of that, it hasn’t disrupted imports too much except during that initial period, where we ended the implementation period.

Paul Heming: What about on labor? Is there any data on labor that you have?

Noble Francis: Yeah, it’s a good question. And one of the reasons we’ve had a significant fall off in construction employment over the last four years is because as we approached Brexit, we saw some EU workers, particularly in London going back to their home countries or going to other EU countries where construction activity was strong. You also see a situation where EU workers who’d finished their projects that they were working on in London went back as they normally do, but the ones who would normally come over to replace them as part of that normal churn weren’t able to come over. So we have seen a decrease in EU labor. It’s not the majority of loss in skills that we’ve had over the past four years. The majority of that loss in skills is due to the age demographic. So we’ve lost a lot of older UK borne workers in the last four years, which is partly due to a lot of self-employed people at that older age range just thinking that they’ve made enough money in the industry construction, even though in some areas it’s relatively strong, it’s been a really difficult three years despite strong demand in some areas, whether it’s due to IR 35, reverse charge VAT, the materials availability issues, the materials, price inflation issues. And so all of these have caused some of the older workers to retire early. Plus, given that a lot of older workers know that the grandfather rights issue for CSCS cards is going to come to a head at the end of next year. So that’s another one of the distortions. You also saw a situation where after the initial lockdowns last year, not just here but around the world, we had global supply chain issues and I think we realized how fragile the global supply chain is.

Paul Heming: Incredibly fragile, isn’t it?

Noble Francis: It is, yes. And what we ended up with is a situation where the main production for an awful lot of manufacturing is in China, but after the lockdowns, we ended up with containers, empty containers in other parts of the world, and that caused some disruption combined with the fact that China was going for zero covid at that time. So we ended up with sharp increases in shipping costs because demand, once it recovered after the initial lockdowns was very strong, not just here but around the world for construction. So you ended up with a situation, where materials availability was an issue in 2020 and 2021, materials inflation was coming through because of that excess demand. And then that’s exacerbated by the shipping costs issue. And just to illustrate that, if you look in summer 2020 as we’re coming out of the lockdowns, then the price of a 40 foot container coming from China to Northern Europe was, you are looking at around 200 to 300 US dollars. And then by October, 2021, which was at the peak of supply chain issues, if you remember when haulage was an issue, you know, there were shortages of some products. Then in October, 2021, that shipping cost price for a 40 foot container had gone up to 14 thousand dollars.

Paul Heming: Yeah, it’s ridiculous, isn’t it? There’s so many potential moving parts and I’m interested to talk to you in the second half of the show about, like concluding these last three years almost of where we’ve been and then actually kind of trying to look ahead to 2024. But we will do that right after this break.
This is a highly risky business that I’m about to go into, Noble, because I myself have been asked quite recently to do some writing, talking about like a view to 2024 and how things are going. And I am no economist, so I’m just a mere quantity surveyor. So for me, even to be talking about this subject with you is highly risky in my professional opinion. One of the things that through the pandemic particularly, you know, we were looking at a lot of these things for a lot of our clients and being asked to talk about it quite a bit. And one of the things that I was using at that time to just kind of understand where like raw material costs were at, etcetera, was there was the lumber future index, which is kind of like the cost of, you’re smiling. So, it’s a strange place to be spending your time, but back in the pandemic, it wasn’t something that I was looking at and just talking about the price of raw timber that kind of went astronomically through the roof in 2020 and 21. And where we find ourselves now in my view is that, or that it has effectively plateaued and we’ve kind of found stability in kind of construction materials or raw materials almost albeit we are now at a level where we’re much higher than we were at the pandemic, albeit we’re at like a plateaued level where we’re much higher. My kind of instinct tells me that on construction, the cost of construction materials, at least in the short medium term, we’re kind of past the worst of it, but my fear is much more around labor and what is happening on the labor side of things. So I don’t know what your view is in terms of kind of rounding the post pandemic world to where we’re up to today and then look into the future.

Noble Francis: Yeah, it’s an interesting question and when you look at materials inflation, and this is a point that actually you could use for inflation for the economy as well, which is that if you look at what economists have been saying then from the economy perspective, inflation has slowed and CPI inflation was 4.6% in September. So everybody, hurrah, it’s great. If you look at materials inflation in September in the year to September, materials fell by 1.8%. So again, hurrah.

Paul Heming: [Inaudible] however.

Noble Francis: Unfortunately, there is a however, which is that that’s how economists think. They look at inflation rates and talk about inflation slowing to only 4.6% for the economy or material materials inflation is falling by 1.8%. The problem is if you are firm down on the ground, then a 1.8% fall after all the rises in the past still means that in September, materials prices were 40% higher than they were back in January, 2020. So it’s important to not just focus on the annual inflation rate because from the economy perspective, inflation being 4.6% sounds good. If you are the prime minister and you’ve set target for that, it’s good. If you’re an economist, however, if you are an average household prices only rising by 4.6%, is challenging, shall we say. And taking it back to construction from a materials prices perspective, if your materials prices are 40% higher than they were in January, 2020, that makes a massive difference. If you are a small specialist subcontractor that is on a fixed price contract that you may have signed up to a couple of years ago, that could really be hitting you hard.

Paul Heming: Yeah, that is obviously highly problematic. I guess my assessment of where we were up to and perhaps where we were headed in 2024 was that materials were less of a short to medium term issue, but that labor quickly would become one or was becoming one. What’s your assessment of where we’re at? And I appreciate you have written a or been part of 118 page report. So your assessment is far more granular and detailed than mine.

Noble Francis: Yeah, I’ll try and give you a summary without boring you. Okay, so from our perspective, the materials availability issues reached a peak back in 2021. The materials price inflation issues reached a peak in 2022 and so far this year, we’ve seen those issues lessened considerably. So materials availability is not an issue anymore really. Materials inflation is slowing, albeit from a very high peak, but materials inflation is slowing. So the key concern medium term is going to be on the skill side of things. And the reason for that is that on the product side, if necessary, if there is a sharp increase in demand, then you can always import, which gives you a degree of flexibility. The problem is on the labor side, we’ve already lost more than 250,000 construction workers in the UK since 2019 Q1, which was the recent peak of construction employment. Primarily due to the older age workers retiring, particularly self-employed ones partly due to a loss of some EU workers. And the problem going forward will be how we replace those and there isn’t an easy solution to that.

Paul Heming: So are we saying that I am not a complete lunatic and my assessment chimes nicely with yours that labor is where the focus is?

Noble Francis: Well, whether you’re a complete lunatic or not, maybe a completely different question, but –

Paul Heming: That is fair. I have just admitted to looking at the lumber futures index for in my spare time. So I’m a bit of a lunatic.

Noble Francis: Well you say that, but back in 2021 I think we were all looking at that index. Certainly in this respect you’re certainly not a lunatic. And what’s fascinating at the moment in construction is that you’ve got some sectors where you’ve got sharp falls in activity such as private house building, housing association, new house building. You’ve got some areas of private housing repair, maintenance and improvement, which is an odd collection of a sector, which is everything from mending a boiler to doing in a conservatory. But that is the second biggest sector after private house building. And you’ve got sharp falls in activity in most of that part of the sector apart from energy efficiency retrofit. So you’ve got some areas of construction where activities falling away very sharply, but simultaneously we do have skill shortages partly due to the loss in employment. But partly because, and this refers back to what I was saying right at the start, which is we treat construction as though it’s an industry, whereas it’s a whole collection of industries. And if you are working on major infrastructure projects at the moment, like HS2 between Old Oak Common and Birmingham, if you are working on Thames Tideway, if you’re working on Hinckley point C or any of the long-term frameworks there in the infrastructure sectors on by the regulated companies, if you are working on commercial retrofit refurb and changes in use, if you are working on industrial warehouses, there’s still lots of activity. If you are working on social housing repair, maintenance and improvement, then there’s lots of activity there.

Paul Heming: Tell me this though, Noble, because having read through your report and don’t scream at me when I say this, but I didn’t read all 118 pages. There were elements I focused on. The thing that I guess, stood out to me as a red flag and a concern is private housing in the context of the shortage of labor. Now private housing, I think I read is the “biggest individual sector within construction service” bigger than the other elements. It’s the number one contributor and in 2023 at the end of it, approximately 20% decrease in output. And I’m guessing that decrease in output therefore means there is a significant decrease in the demand for labor. But over time, we’re expecting that to go back. We’re expecting interest rates to call, mortgage applications to go up, brick deliveries to go up. Everything will eventually over the coming years not immediately necessarily lead to an increase in output. Now when there is an increase in output, there is gonna be a significant increase in the demand for labor, which we already have this shortage. And it’s maybe not being as keenly felt today was my assessment because the biggest sub-sector within our industry, sorry, is not even at full capacity. If anything it’s at 20% less. So when it does return to full capacity, there’s gonna be a bigger need for labor and all of a sudden the shortage that we’re feeling now is gonna feel much worse. That’s kind of the red flag that I saw potentially coming down the line.

Noble Francis: I certainly think you are right in that longer term skills is going to be the absolute critical issue. I would be a bit wary of saying skill shortages are bad now, so they’re going to be even worse when house building comes back because a part of the reason that skill shortages are such a big issue now despite the fall in house building is because the skill shortages are in very different areas. They’re in infrastructure, they’re working on commercial refurb and changes in use. They’re not so much around the housing area. What is likely to occur is that house building is likely to be subdued next year as well and we are likely to see recovery after that once we get into 2025 and beyond. But it’s not going to be a rapid recovery and it’s not going to return back to last year’s levels of house building for quite a few years. So that gradual buildup in demand over time means that there is time to put in place a plan if you are government to train people up for what is going to be needed medium term because we do need to build more homes. The big issue is that government is not great at skills, it’s not great at training, it’s not great at long-term structure.

Paul Heming: Yeah, yeah.

Noble Francis: And we see that with some of the policies they put in place, whether it’s based around IT levels or whether it’s based around the apprenticeship levy, which the majority of large firms effectively treat as attacks and they don’t take significant funds from it and do training because most larger firms are already doing training whereas the problem within construction is the majority of the employment as I mentioned near the start, 86% of employment in construction is in small and medium sized firms.

Paul Heming: Yeah, yeah, no abs absolutely. I mean you’ve brought me nicely round to government and policy and for our listeners, we are recording this right at the end of 2023. So next year for us is 2024 and we are talking, kind of looking ahead to 2024 and at this point we are a few weeks out from the autumn statement. Now, could you just give us your reflections on whether anything in the autumn statement dramatically shifted or even mildly shifted your view on like what 2024 brings for construction?

Noble Francis: From our perspective, I think the autumn statement was largely what we were anticipating. Some people within housing were in despair that they didn’t get very much from the autumn statement, but they weren’t likely to, quite frankly. The autumn statement occurs at the end of a year where we’ve got a general election coming up next year. So the autumn statement was always going to be aiming at direct policies to make people feel as though they’ve got more money. So effectively, tax cuts like national insurance rate cuts and an increase in the national living wage as well. They were also likely to be focusing as a government in terms of stimulating business investment as well. So you will have heard quite a lot of talk about full expensing which incentivizes more investment. What the government wasn’t likely to do, given a general election next year is focus heavily on capital expenditure, increases IE investment in construction and house building.

Paul Heming: Can I ask kind of why not, or I remember reading in your report and I thought it was quite interesting that you kind of in your exec summary talked about potential risks/opportunities for 2024 and one of them was the UK general election and you kind of framed that as the general election could either be quite positive for the industry or potentially have next to no impact. Is there some, like, could you reflect on that for us?

Noble Francis: Yes. From a positive risk point of view, the autumn statement could have been one where they would announce stimulus to help the economy in advance of a general election because they want voters to feel better off. However, that’s not likely to be on the construction site because if you think about stimulus from the government perspective, if they make a decision on something, then the funding has to go to government departments, there has to be procurement before you see any of the boost in economic activity from that construction down on the ground. It takes a long time, whether it’s on the schools program, hospital program, major infrastructure. And quite frankly, if you look from the school’s, hospital’s infrastructure perspective, any of the projects that are going to deliver down on the ground next year have already been signed up to in many years in advance. So making announcements now may have a slight public relations benefit, but it’s not gonna have a real effect. What would have a real effect from a government perspective is changing tax or for working people, that sort of thing, or changing tax on business investment. And that’s where they focus most over their announcements. The main risk from the autumn statement or from government going into an election year is we may have concerns that in the few months before the election, government will be effectively on hiatus. There’ll be a hiatus in government policy decisions and there’ll be a hiatus in signing off public sector projects just because there’ll be a view of let’s just wait till the election’s over and then we can sign things off if things remain the same.

Paul Heming: Yeah, yeah. And so in short, your summary would be, or your reflections on it all would be that we kind of are where we are with policy now until beyond the election. And therefore, you know, if you were really, almost bringing it back to, you know, those posts that you make, which like you say are kind of your way of summarizing or snapshotting key barometers of where we are at. If you were, and you are talking now to lots of SME even tier one contractors, developers, subcontractors who are listening to this today. If you were to say to them like two or three key metrics that they should be really keeping their eye on to understand where the industry is at, which three would you draw out?

Noble Francis: It’s a good question. Depends which sector you are looking at. If you’re looking overall at construction, then what I would be looking at is the new orders data or contract awards data, which comes out quarterly. But there are organizations that publish monthly data on contract awards by sector and by sub-sector. So that’s a critical one. I’d also be looking at construction insolvencies and we’ve already seen that if you look at the year to September, 2023, then construction insolvencies, we’re already at their highest level since the financial crisis. Now some of those are companies that may go under and then restart under a different name, but the fact that they’re already at that highest level since the financial crisis is an area of great concern, particularly within the house building area within the RM and I area, not so much in the infrastructure area because 95% of those construction insolvencies weren’t civils firms, but the fact that construction insolvencies are at their highest levels since the financial crisis is a big concern for us. And then what I would be looking at, and given that you’ve only asked for three measures, I’m gonna cheat and use. I’ll put two together.

Paul Heming: You can give me four if you want.

Noble Francis: Okay. I’ll give you four. So the other two are based around materials, price inflation and construction wage inflation. It’s not an easy thing to measure skill shortages, we know skill shortages are there in certain areas because we hear about it so much. However, you can see it reflected in the wage increases. And now we’re at a situation where we’ve got real wages rising finally as inflation slows. So the fact that real wages are rising, the fact that nominal wages in construction are rising at 7% a year is an illustration, it’s a proxy measure for those school shortages that are out there. And then the materials inflation, I would also take note of, because we’ve mentioned already how materials inflation is slowing and materials prices overall are actually falling at the moment and some materials are falling at a double digit rate from a high peak. But given that we’re likely to see energy prices increase over the winter period, given that we may see OPEC plus and the oil cartel cutting production or persisting with production cuts, we may see oil prices rise in the new year. And if so, we may see that next year materials prices don’t fall as much as some people are expecting. And so we may see materials prices are a bit more stubborn and so the materials prices falling that we’ve seen so far this year may be a bit more stubborn and they may not fall back to levels that we saw three, four years ago.

Paul Heming: Yeah, it’s really interesting. And I mean that’s slightly worrying just to hear that, but it’s the fact that what you’re talking about is new orders or contracts placed, construction insolvencies, materials price inflation and construction wage inflation. And those are generally gonna be available on monthly, if not quarterly. Kind of metrics. And what your advice is to those listening is if you really want to have a gauge of where this industry is at, where the industry is heading, or to see trends, you’ll see them in those four key charts effectively. Can I ask you a question, which is probably gonna only underline my ignorance on the topic, but there’ll be business owners, whoever who will now think, right? I’m gonna go and look at those four key metrics to try and understand and plan. As an economist, at what point does something become a trend on which you can start to “kind of place bets on that”, you think, okay, this is actually something which is sticking in. Is it every, if it’s two or three months, is it two or three quarters that need to have passed before you can start to really get a feel for it? Like how do you understand that?

Noble Francis: Okay, so good question. What you do with something like materials price inflation is you start to see the shape of the curve changing. So even earlier this year, materials price inflation was still rising, but it was slowing considerably. So it’s not when materials price inflation terms negative, it’s before then because you can see the shape of the change. Secondly, what you do is you look at the factors that are driving it, the early indicators, and we referred in a very different area, but to brick deliveries. But in this area, you look at some of the things that drive materials prices, and that could be on the energy price side because if you look at most construction products that go into early construction, whether it’s cement, concrete, bricks, steel, they are very energy intensive products, energy accounts for around one third of production costs for those sort of materials. And so you look at energy prices for manufacturers for heavy industrial usage, not for households because those early indicators will show you what is going to occur around three, six months down the road for materials prices.

Paul Heming: And so if you are looking at the materials price index and say, okay, last couple of months it’s that curve has softened or it’s flattened, and then actually go and look at energy prices for big industry and see that over the last three to six months, it’s dropped, you would then be able to say, okay, I’m feeling much more confident about where material prices are likely to go in the next couple of months, basically.

Noble Francis: Yes. So for instance, if you look at materials price inflation, which peaked at 26.8% and back in summer last year after the spikes in energy and commodity prices, as you get a year on from that, the annual percentage change is naturally going to be falling. And if you look at the year to July, materials prices were falling at 4% per year, but at the same time that they were falling at 4% per year, July is when OPEC plus announced production cuts to raise the price of oil. And so because of that, you can see, okay, at the moment, materials prices are falling because we’ve looked at the shape of the curve, materials prices are falling 4% a year, but it’s not going to continue to fall at that rate.

Paul Heming: Cause there’s a red flag.

Noble Francis: It’s going to be, yeah.

Paul Heming: Yeah. It’s fascinating just talking to you about this, and I may be naive here, but I don’t think that there are too many, particularly in the SME side contractors who are always monitoring this in the way that you’ve kind of just outlined as a way of refining and better understanding your strategy, whether it still makes place in the wider macro environment that we’re in. Even when you are issuing out tenders, you’re about to go into a fixed price contract, right? Just understanding where the next 3 to 6 to 12 months it’s gonna take you is obviously absolutely key. But just talking to you today and understanding those things in granularity has been absolutely fascinating. And I will absolutely be sharing your LinkedIn profile along with obviously details of the CPA because I wholeheartedly believe that everyone should go and follow what you say there. And you really smile when I talk to you about it. But it is, I speak to other people in the industry and they say how useful they find it. So all I can say is thank you very much for doing that. I’ll obviously share the reports, I’ll share your details and thank you finally for saying oh, all right, I’ll speak to this guy at long last because it has been a great pleasure to speak to you, mate.

Noble Francis: Thank you very much. Good to speak to you too.

Paul Heming: Thank you very much. And guys, I will obviously leave the details of that eBook in the notes as well. I will speak to you next week. Have a good weekend.

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