UK Construction Market Report 4Q 2023
Inflation forecasts
Key statistics:
Inflation impact
said that inflation is impacting the viability of schemes, maintaining the high levels in our surveys covering 2023.
Viability of schemes
ranked interest rates and inflation as the biggest threat to the construction industry.
2024 tender opportunities
of respondents think 2024 tender opportunities will be the same or more than in 2023.
Figure 34
Uncertainty is the new normal?
The timeline in Figure 34 shows various significant events since 2016.
A brief summary of events
Starting with the EU referendum, which led to the largest drop in EU nationals in the workforce since records began in 2018 and concerns that negotiations would end in no deal delaying investment decisions in 2019.
Early 2020 brought the COVID-19 pandemic, with enormous repercussions for the construction industry and the wider economy, as lockdowns restricted activity.
A Brexit agreement was reached at the end of 2020, as a new variant of COVID-19 meant lockdown restrictions again.
The COVID-19 vaccine roll-out started at the beginning of 2021. Cost escalation of commodities, construction materials and products started as economies emerged from the worst of the pandemic.
The end of 2021 saw energy prices rise due to reduced natural gas supplies. The Bank of England also increased interest rates from 0.25% — the first increase in three years.
In February 2022, Russia invaded Ukraine. As well as a humanitarian crisis, the conflict caused shockwaves in other areas, including commodities pricing, with particular spikes in energy costs raising input costs.
Rising inflation and cost of living pressures worsened and the disastrous mini-budget spooked markets in September 2022.
The government announced energy support for households and businesses. Although there was widespread fear of a difficult winter, better-than-expected European gas storage, a milder-than-average winter and a constrained Chinese economy helped the position and energy prices started to fall.
China began easing COVID-19 restrictions at the end of 2022. Expectations were that its economy would rebound and see immense growth. However, it did not live up to these forecasts and China used fewer commodities than expected.
In August 2023, interest rates reached 5.25% to curb inflation. Although consumer price inflation reduced from 11.1% in October 2022 to 6.7% in August 2023, it remained well above the Bank of England's 2% target.
After 14 consecutive rises, interest rates were left unchanged in September 2023.
Entering 4Q 2023 saw the start of the Israel-Hamas war.
The timeline helps to show the significant volatility seen since 2016, with the rate of major events increasing as time goes on. Some say we live in a time of "permacrisis". So much so it was Collins Dictionary's word of the year for 2022, describing the feeling of living through a period of war, inflation and political instability. Although these events are not of the construction industry's making and are out of its control, they have huge ramifications on it. It is, therefore, unsurprising that there is more cautiousness now than there has been previously.
Most respondents, 43%, 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 materials and labour cost escalation as the third-highest issue.
The majority of respondents (85%) said that inflation is impacting the viability of schemes, maintaining the high levels in our surveys covering 2023.
Viability poses challenges for both public and private sector projects. Many schemes are going ahead, but there are often lengthy feasibility and due diligence reviews before commitment.
Securing finance is difficult and The Building Safety Act is also delaying some schemes due to redesign requirements to incorporate second staircases.
Global headwinds and wider economic pressures continue to weigh on the construction industry. The supply chain is highly cautious, feeling the pinch 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.
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, less than a quarter (23%) of respondents think 2024 tender opportunities will be less than in 2023.
Some clients are pressing on with projects as they do not expect significant improvements in the market, while others are responding to the strength of need and therefore, investment is unavoidable. Market demands, such as tenant expectations for high-quality, sustainable buildings, also drive decisions.
With the pressure on skills and labour, it’s questionable whether there would be the resources to deliver the levels of investment previously planned with the huge pipeline of energy and infrastructure investment as well as retrofitting work to meet net zero targets.
As funding pressures continue, there will likely be more opportunities and distressed assets coming to market, which will improve prospects for the construction industry.
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 awash with uncertainty, from geopolitical tensions to economic fluctuations, that could significantly influence inflation rates. This volatile element adds another layer of complexity to an already challenging environment for the construction industry. As such, diligence and adaptability are more crucial than ever for stakeholders when assessing inflation rates and project viability.
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. Market appetite is also essential as regional and sector variations remain.
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