Inflation forecasts

Most respondents, 35%, ranked interest rates and inflation as the biggest threat to the construction industry. Following this, they ranked investor confidence as the second most significant challenge, with global tensions as the third-highest issue.

The majority of respondents (83%) said that inflation is impacting the viability of schemes, maintaining the high levels in our surveys covering 2023.

Viability presents obstacles for both public and private sector projects. Many schemes are going ahead, but there are often lengthy feasibility and due diligence reviews before commitments are made.

Global headwinds and wider economic pressures continue to weigh on the construction industry. Forecasts indicate that construction output will fall in 2024, and the expected UK general election will cause slowing.

However, some parts of the supply chain have good levels of pipeline filled and such companies can afford to be selective in which projects they pursue.

In general, the supply chain is highly cautious, feeling pressure from cost escalation, inflation and labour availability challenges. Therefore, it is reluctant to over-commit or expose itself to risk, becoming more selective and in what some describe as aggressive in some scenarios.

The high levels of construction insolvencies seen also adds to caution. In some areas, capacity has been taken out of the market and it can be difficult to pull together tender lists. Projects still need to be attractive to the market, rather than assuming the supply chain wants work regardless of risk profile.

Whilst tender prices are becoming better aligned to estimates and the supply chain is looking to fill future pipelines; pricing is becoming more competitive but not in the realm of buying projects or undercutting.

Despite the slowing down of the market and evidenced challenges, only 18% of respondents think 2024 tender opportunities will be less than in 2023, an improvement compared to our 4Q 2023 survey.

Some clients are moving forward with their projects, anticipating limited improvements in the market, while others are driven by the urgency of specific needs. Market demands, including tenant expectations for high-quality and sustainable buildings, also influence decisions. As funding pressures continue, more opportunities and distressed assets will likely become available, providing opportunities for the construction industry.

The latest S&P Global UK Construction PMI echoed this sentiment. The index registered 48.8 in January, up from 46.8 in December and the highest reading since August 2023, although it did remain below the crucial no-change threshold of 50.0. However, the release also indicated the highest level of business optimism since January 2022, with around 51% of the survey panel forecasting a rise in business activity in the year ahead, while only 12% predict a decline. Respondents cited factors likely to boost construction activity over the course of 2024 as lower borrowing costs and higher consumer confidence.

All in all, it remains a challenging landscape for the construction industry, which will continue to be influenced by external factors, including the wider economy and global pressures.

The global landscape is uncertain, from geopolitical tensions to economic fluctuations, which could significantly influence inflation rates. This volatility adds another layer of complexity to an already difficult environment for the construction industry.

As per our previous advice, it is important to consider inflation on a case-by-case basis: factors such as size, sector, specification and procurement and tendering strategies may all influence tender prices. Consideration of market appetite is also essential as regional and sector variations remain.