Q1 2023

Our forecasts

The construction sector bucked the broader economic trend in the latter half of 2022, expanding when other core sectors of the economy contracted. As the stand out sector, strong output growth in 2022 provided the industry with a buffer of workload and laid a solid foundation for the industry to enter an economic slowdown.

Reassuringly, some key sources of construction cost inflation are set to ease or fall back in the coming months. This is welcome news as we enter what is expected to be the second global recession in less than three years. Economic headwinds and projected reductions in workloads will act to partly offset some prevailing inflationary pressures, but this easing of inflationary pressure will likely be accompanied by a greater degree of caution for some as they navigate an increasingly challenging market. However, with certain sectors and project types being more exposed to recessionary conditions than others, a two-speed, forward inflationary picture may evolve as we move through the year.

There are compelling signs that headline inflation has finally peaked and, as with the broader or macro inflationary trend, 2022 could prove to be the high-water mark for construction tender price inflation. Still, little downward construction cost movement is expected in 2023. Instead, the consensus across much of the supply chain is for a ‘levelling off’ in the rate of tender price inflation rather than any overall downward movements this year.

The rapid tightening of interest rates by central banks globally has, as intended, led to an economic slowdown and played a role in cooling inflation. With further rate rises expected however, banks are unlikely to end their rate-tightening cycle just yet. It is far from certain that underlying inflationary pressures will be stamped out this year and concerns linger that inflation may take too long to fall back to the central bank’s 2% target. These concerns, particularly across Europe, are linked to the time it will take for the 2022 energy shock to fully work its way through the economy. Furthermore, tight labour markets in which wages are rising at rates that are incompatible with 2% inflation targets will be a further source of domestic inflation.

A key knock-on effect of recent aggressive rate tightening to the construction sector has been the increased risk profile for securing project funding. This, in conjunction with elevated construction input costs, has had an impact on tendering activity with some projects ultimately pausing or being shelved. While a reduced supply of new projects to tender may help with the recent contractor capacity issues and encourage more competitive tendering, certain stubborn underlying inflationary pressures will ensure a positive inflation figure overall for construction costs in 2023.

With various material price increases scheduled for January, G&T forecasts the profile of tender price inflation in 2023 will accordingly start off high, but subsequently reduce as recessionary pressures bite harder as we move through the year. Overall, our weighted 2023 tender price inflation forecast for the UK is 2.75% - slightly higher than our long-term average which is reflective of ongoing energy-driven pressures on some materials categories, as well as pressures from the cost-of-living crisis and a shrinking pool of resource on labour costs. Acting against these pressures and holding even higher rates of potential inflation in check will be a forecast contraction in new work orders and output and in certain sub-sectors. Accordingly, inflation trends will see some divergence depending on the specific sector, with those affected most by recession likely to see some discounting by main contractors on controllable on-costs in order to secure long-term pipeline. More protected sectors (such as infrastructure, industrial and even London commercial office fit-out, where demand is expected to remain relatively strong) will likely see significantly higher rates of tender price inflation in 2023.

Beyond 2023, assuming no unknown seismic economic shock, we envision a return to more typical inflation rises in line with the long-term average rate of tender price increases. From 2024, our weighted average TPI forecasts then drop further to 2.5% each year until 2026 on the expectation that energy prices won’t continue to rise so quickly, any remaining global production difficulties for products and materials end and that demand conditions normalise. Of course, if the past few years have taught us anything, it’s that the future is largely unpredictable and that making specific long-term forecasts and predictions can be a futile exercise. As such, our forecasts continue to be subject to a high degree of market uncertainty and will continue to be reviewed on a regular basis.

All forecasts in this report take account of all sectors and project sizes as a statistical average, indicating an overall trend in pricing levels. It should be remembered that individual projects may experience tender pricing above or below the published average rate, reflecting the project specific components and conditions.

Unless otherwise indicated, figures show annual growth rates. Arrows indicate direction of movement over a one-year period.

The Economy

There is a very strong correlation between GDP growth in the wider economy and construction output/activity. However, economic growth tends to lead construction activity. With a protracted but shallow recession being widely forecast in the UK for much of 2023, many expect a lagged impact on construction output/activity growth. One silver lining is that tender price indices (which reflect the price of construction materials, labour, and plant) also tend to fall in times of economic recession. After years of rampant input cost inflation, recession may be the force that douses the stubborn inflationary flames that have engulfed the sector.

Although a synchronised global slowdown is on the cards, leading economists forecast the UK will experience a worse recession in 2023 than most other advanced economies. Unwise short-term actions, the impact of Brexit and poor investment growth are expected to affect the UK’s longer-term economic performance. Although the peak to trough contraction of GDP is likely to be shallow (c.1-2%), a number of economic forecasters anticipate five-six quarters of recession (starting in 3Q 2022) as household consumption falls. Consumer confidence is already at or close to historic lows, and that is before unemployment has started to rise. However, as recession bites headline inflation is expected to fall so long as there is no repeat of the recent supply-side shocks.

The UK’s 10.7% annual CPI figure in November is a consequence of several factors – but primarily the knock-on effect of the war in Ukraine on commodity, food and energy prices, as well as global supply chain bottlenecks (both pandemic and war-related). Without the Government’s Energy Price Guarantee package or ‘EPG’ (which caps the unit price of energy) the OBR estimates that inflation would have peaked at 13.6% in early 2023 (2.5% higher than forecast with the EPG). However, both the OBR and the Bank of England (BoE) expect annual inflation to ease in 2023 as the steep rises in energy prices seen in 2022 fall out of the annual comparison (ie the mathematics of ‘base effects’). The OBR expects inflation to slow to 3.8% by Q4 2023, while the BoE forecasts a rate of 5.2% for the same period, partly due to the expectation that domestic inflationary pressures will “remain strong”.

Additional base interest rate rises to quell inflation (and to safeguard the credibility of monetary policy in the face of question marks over fiscal policy) have been pencilled in by markets, further squeezing household and business budgets in 2023. Despite BoE Governor Andrew Bailey claiming in December’s Monetary Policy Committee meeting that inflation has “reached its peak”, Bailey suggested a tight labour market and inflationary pressures in domestic prices and wages could indicate greater persistence that justifies a “further forceful monetary response” in order to see a sustainable return of inflation to its 2% target. Whether this means rates will have to rise as high as financial markets expect, which at present are forecast to peak just above 4.5% by mid-2023, remains to be seen but more hawkish voices on the MPC noted the need to combat an “inflation psychology” that was embedding itself in wage settlements and inflation expectations. With private sector wage growth at more than 6%, companies may be forced to keep increasing prices for goods and services sold at rates well above the BoE’s target.

Regardless of how quickly inflation returns to target, businesses should find some relief from falling goods price inflation in 2023. While the first order of business may be to bring inflation down, inflation isn’t the only issue affecting the UK economy: skill shortages, high non-employment (ie those not in work and not seeking work) creating a tight labour market, longstanding relatively poor productivity performance and weak business investment are all fundamental problems that risk becoming structural rather than cyclical without policymaker intervention or a plan to boost long-term growth.

Construction Output and New Orders

Construction output defied the economic slump in Q3 (the latest full quarter we have data for). Output rose by 0.6% in a quarterly basis to reach a new record high. Q3 2022 marked the fourth consecutive quarter of output growth for the sector, making it the odd one out of the UK’s major sectors which all stagnated in Q3. More recent monthly data also revealed a continuation of the Q3 growth trend with total output in October growing by 0.8% month-on-month.

As ‘Repair and Maintenance’ output growth slowed in Q3 (-2.2%), total ‘New Work’ output picked up the slack and grew by +2.4% - reversing the trend seen in earlier in the year of Repair and Maintenance being the main growth driver. Although the most recent PMI survey reports and forecasts from the Construction Products Association suggest output growth will see a dip in 2023 (-3.9% according to the CPA’s latest Autumn 2022 industry forecast), 2022 has provided the industry with a solid cushion of workload and a good foundation for the industry to enter an economic slowdown.

This year’s forecast dip in total output does not mean activity in all sub-sectors will contract – some are set to buck the overall negative trend. Below we summarise growth expectations for some of the key UK sectors and incorporate the CPA’s latest output forecasts:


  • Industrial is currently the fastest-growing construction sector and there is a strong pipeline of new projects, but growth rates are set to cool in 2023 as demand for warehousing peaks
  • Rising construction costs and lower end consumer demand are set to dampen growth. Regardless, output is expected to rise by 3.1% in 2023 before falling by 1.5% in 2025


  • Infrastructure is also expected to remain in growth territory next year due to increased activity on major projects. However, sustained cost inflation will hit fixed budgets and lead to a variety of adverse issues for central government, private firms in regulated sectors and local authorities. With the current economic challenges, the Government is likely to be focusing on cost cutting rather than increasing budgets, so infrastructure spend for 2023 may be lower than previously expected
  • Overall, infrastructure output is forecast to rise by 1.6% in 2023 and 2.6% in 2024 as the Government focuses on larger projects already on the ground. In the longer-term, however, the sector will likely see the value of construction spending previously anticipated but not the volume due to substantial cost inflation since the IPA’s Spending Review in November 2021


  • Whilst the housing market and housebuilding sector currently remain robust, falls in demand are expected to hit both in 2023. Starts are anticipated to fall by 10% in 2023 whilst completions fall by 8%. However, the risks are heavily weighted to the downside and considerably greater falls may occur if interest rates rise more than expected and if the housing market hits a tipping point


  • Forecasts for the commercial sector have been downgraded sharply since the Summer to reflect a broader economic slowdown and recession in 2023. Output is expected to contract by 5.1% in 2023 as confidence for consumer-focused sub-sectors such as retail and entertainment that are already contending with the rising cost of living worsens. The CPA suggests this could lead to delays for larger office tower projects that were expected to start in 2023 and 2024.

Turning to new work, like output Q3 new order data from the ONS was also positive suggesting that order books remained strong. New order growth rose by 6.4% in Q3, remaining some 8.5% above the five-year quarterly average new order figure. Not all sub-sectors fared well in Q3, however. New order growth contracted in the new housing sectors (-5.8%) while orders for public new work also dipped in the quarter (-1.1%). However, a 28% increase in new commercial work and a 6.5% quarterly rise in infrastructure new orders more than made up for the weaker residential sector. Again, recent PMI data from construction companies suggests the third quarter spike in new orders won’t mark the start of a sustained upward trend. Weakening demand is starting to squeeze the pipeline of new construction work. Waning sentiment in the wider economy, rising interest rates and high construction costs have dampened demand and lead to greater degree of hesitancy/caution before committing to new work.

Despite the reduced medium-term prospects for new work growth, data from Glenigan suggests there is a strong development pipeline. The value of detailed planning approvals increased 6% during the three months to November to stand 3% higher than the same period one year ago. This has been driven by key sectors such as industrial, civil engineering and health. However, strong planning approval growth won’t necessarily translate into new starts in 2023. Tough economic conditions, high interest rates and heightened materials prices will likely put some of these approved projects on ice, preventing them from moving to site until better market conditions materialise. In fact, Glenigan’s report points to a 50% increase in the time taken for a project to move from planning approval to start on site in light of these economic conditions and market pressures.

Other forward-looking gauges of activity and workload growth suggest expectations for 2023 are subdued. December’s S&P Global/CIPS UK Constriction PMI report pointed to the fastest contraction in construction sector output since August 2022 while new orders and purchasing activity declined the most for over two-and-a-half years, driven by weak client demand. Furthermore, business sentiment dipped into negative territory for the first time since the initial COVID-19 wave and for only the sixth time on record. The latest RIBA Future Trends Workload Index (which monitors business and employment trends affecting the architects’ profession) returned a balance of -21 in November, suggesting architects on the whole remain pessimistic about workloads across all monitored work sectors (but particularly about private housing).