Inflation forecasts

Most respondents identified interest rates and inflation as the biggest threat to the construction industry, with 21% ranking it as the top threat. Encouragingly, though, this percentage is reduced from our last survey when 35% of respondents ranked it first. There's also anecdotal evidence suggesting a resurgence in projects previously on hold, buoyed by expectations of lower interest rates later in the year.

Other industry data agrees there has been a shift. The Q1 RICS UK Construction Monitor saw the headline reading for current workloads broadly flat but with reports of enquiries for future developments picking up, with this also evidenced in the expectations metrics.

March 2024 witnessed a rebound in total industry activity, marking the end of a six-month decline according to the S&P Global UK Construction Purchasing Managers' Index (PMI). The headline index rose from 49.7 in February to 50.2 in March (above the 50.0 neutral threshold) — the index was at its highest level since August 2023.

Approximately half of the surveyed panel anticipates a rise in output levels over the next year, signalling a cautiously optimistic sentiment. Respondents often commented on a turnaround in sales pipelines and greater new business enquiries thanks to the improving economic outlook and greater stability in financial conditions.

Yet, amidst these positive signs, apprehension lingers. Investor confidence and concerns over insolvencies and supply chain capacity rank as the second-highest threats according to our survey respondents, indicating prevailing caution in the market.

The supply chain remains highly cautious due to pressure from cost escalation, inflation and labour availability challenges. Consequently, it is reluctant to over-commit or expose itself to risk, becoming more selective and in what some describe as aggressive in certain scenarios.

The impact of construction insolvencies further underscores this caution. In certain regions, capacity has been taken out of the market, complicating the assembly of tender lists. Projects need to appeal to the market, with due consideration of the risk profile.

Despite the lingering uncertainty and the likelihood of further surprises, there are signs of a gradual improvement in the overall landscape. Although slow to progress, a substantial investment pipeline remains, and its delivery is crucial for transitioning towards a net-zero future and building resilience in our public services, energy and infrastructure.

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 can significantly influence tender prices. Additionally, understanding regional and sector-specific market dynamics remains crucial as this affects supply chain appetite and pricing.