Building firms going bust at fastest rate since financial crisis
Construction businesses are going bust at their fastest rate in a decade, driving the number of company insolvencies to its highest level since the financial crisis.
Rising material costs, staff shortages and plummeting consumer demand are weighing on businesses, forcing them to squeeze their margins to unsustainable levels.
Official figures show that in the second quarter of this year, company insolvencies in England and Wales reached their highest quarterly level since the third quarter of 2009.
In the first half of the year, the Insolvency Service recorded 10,717 company insolvencies.
The construction sector accounted for a fifth of these with 2,094 businesses going bust.
The industry had 1,048 insolvencies in the first quarter of the year, which marked its highest level since the same quarter in 2012.
The industry, which accounts for around 7% of the economy, is especially vulnerable to rising inflation because businesses often operate with slim profit margins.
Construction materials typically account for between 20-25% of the cost of most building projects and the price of core materials, including timber and steel, have rocketed over the past year.
According to figures compiled by the business department, the cost of steel bars rose by 17% in the year to October.
The cost of blocks and bricks has risen by 18% and timber is up 19%.
A recent report by the Federation of Master Builders found that the vast majority – 90% – of its members have been hit with higher costs over the past year.
They are also battling with shortages of key staff, including labourers, carpenters, joiners and bricklayers.
In a sign of the economic malaise plaguing Britain, builders said they were struggling to pass these costs on as clients were pulling projects and refraining from commissioning new ones.
Local builders most vulnerable
Smaller, local builders are especially vulnerable as they are less able to benefit from economies of scale so are more exposed to sharply rising costs.
Mark Wigley, managing director of Osprey Homes, a small-to-medium sized housebuilder in Hertfordshire, said: “It makes the viability of certain projects very difficult, in as much as we have to assemble our financial appraisals well in advance of bidding for new land and that generally takes a minimum of 12 months.
“House prices are not increasingly in line with the costs of our material increases.
“So as a result, the developers are really carrying a lot of additional costs that we’re finding it very difficult to absorb within our day to day business.”
Mark Wigley, managing director, Osprey Homes
He warned that smaller businesses were at the sharp end of the crisis because they are less able to benefit from economies of scale.
“If we’re not careful, then houses will just be built by the big PLCs who are only really interested in these massive development sites,” he said.
“So these little infill plots, where we are able to demonstrate high quality, will just cease to exist.
“We employ a lot of people within the construction industry and the wider economy.
“So the ripple effect of anything that happens to our industry is quite significant.”
The business secretary will next week hold talks with dozens of private sector bosses as the government contends with a significant corporate backlash to Labour’s first fiscal event in nearly 15 years.
Sky News has learnt that executives have been invited to join a conference call on Monday with Jonathan Reynolds, in what will represent his first meaningful engagement with employers since Wednesday’s budget statement.
Rachel Reeves, the chancellor, unsettled financial markets with plans for billions of pounds in extra borrowing, and unnerved business leaders by saying she would raise an additional £25bn annually by hiking their national insurance contributions.
An increase in employer NICs had been trailed by officials in advance of the budget, but the lowering of the threshold to just £5,000 has triggered forecasts of a wave of redundancies and even insolvencies across labour-intensive industries.
Sectors such as retail and hospitality, which employ substantial numbers of part-time workers, have been particularly vocal in their condemnation of the move.
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On Friday, the Financial Times published comments made by the chief executive of Barclays in which he defended Ms Reeves.
“I think they’ve done an admirable job of balancing spending, borrowing and taxation in order to drive the fundamental objective of growth,” CS Venkatakrishnan said.
His was a rare voice among prominent business figures in backing the chancellor, however, with many questioning whether the government had a meaningful plan to grow the economy.
Mr Reynolds held a similar call with business leaders within days of general election victory, and over 100 bosses are understood to have been invited to Monday’s discussion.
A spokesman for the Department for Business and Trade declined to comment ahead of Monday’s call.
First things first: don’t panic.
What you need to know is this. The budget has not gone down well in financial markets. Indeed, it’s gone down about as badly as any budget in recent years, save for Liz Truss’s mini-budget.
The pound is weaker. Government bond yields (essentially, the interest rate the exchequer pays on its debt) have gone up.
That’s precisely the opposite market reaction to the one chancellors like to see after they commend their fiscal statements to the house.
In hindsight, perhaps we shouldn’t be surprised.
After all, the new government just committed itself to considerably more borrowing than its predecessors – about £140bn more borrowing in the coming years. And that money has to be borrowed from someone – namely, financial markets.
But those financial markets are now reassessing how keen they are to lend to the UK.
The upshot is that the pound has fallen quite sharply (the biggest two-day fall in trade-weighted sterling in 18 months) and gilt yields – the interest rate paid by the government – have risen quite sharply.
This was all beginning to crystallise shortly after the budget speech, with yields beginning to rise and the pound beginning to weaken, the moment investors and economists got their hands on the budget documentation.
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Chancellor challenged over gilt yield spike
But the falls in the pound and the rises in the bond yields accelerated today.
This is not, to be absolutely clear, the kind of response any chancellor wants to see after a budget – let alone their first budget in office.
Indeed, I can’t remember another budget which saw as hostile a market response as this one in many years – save for one.
That exception is, of course, the Liz Truss/Kwasi Kwarteng mini-budget of 2022. And here is where you’ll find the silver lining for Keir Starmer and Rachel Reeves.
The rises in gilt yields and falls in sterling in recent hours and days are still far shy of what took place in the run up and aftermath of the mini-budget. This does not yet feel like a crisis moment for UK markets.
But nor is it anything like good news for the government. In fact, it’s pretty awful. Because higher borrowing rates for UK debt mean it (well, us) will end up paying considerably more to service our debt in the coming years.
Rachel Reeves leaving 11 Downing Street before the budget. Pic: PA
And that debt is about to balloon dramatically because of the plans laid down by the chancellor this week.
And this is where things get particularly sticky for Ms Reeves.
In that budget documentation, the Office for Budget Responsibility said the chancellor could afford to see those gilt yields rise by about 1.3 percentage points, but then when they exceeded this level, the so-called “headroom” she had against her fiscal rules would evaporate.
Read more:
Chancellor defends £40bn tax rises
Hefty tax and spending plans a huge gamble – analysis
In other words, she’d break those rules – which, recall, are considerably less strict than the ones she inherited from Jeremy Hunt.
Which raises the question: where are those gilt yields right now? How close are they to the danger zone where the chancellor ends up breaking her rules?
Short answer: worryingly close. Because, right now, the yield on five-year government debt (which is the maturity the OBR focuses on most) is more than halfway towards that danger zone – only 56 basis points away from hitting the point where debt interest costs eat up any leeway the chancellor has to avoid breaking her rules.
Now, we are not in crisis territory yet. Nor can every move in currencies and bonds be attributed to this budget.
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Markets are volatile right now. There’s lots going on: a US election next week and a Bank of England decision on interest rates next week.
The chancellor could get lucky. Gilt yields could settle in the coming days. But, right now, the UK, with its high level of public and private debt, with its new government which has just pledged to borrow many billions more in the coming years, is being closely scrutinised by the “bond vigilantes”.
A Halloween nightmare for any chancellor.
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