With market activity slowing in some sectors and deflationary pressures mounting, contractor pricing is expected to be more competitive in 2024. Although procurement conditions may become more favourable, interest rates and the high cost of debt remain a key pressure on viability.
Despite forecasts that workload, output and new orders will contract overall in 2024, the picture is more nuanced. Pockets of the industry will remain busy and some sectors are expected to buck the broader trend. Retrofit work and commercial refurbishments will continue to grow, supporting workloads, while residential new starts remain stalled and the sector subdued.
In a continuation of last year’s emerging trend, all signs point to a further easing in the rate of tender price inflation in 2024. Key input cost pressures have eased following a rebalancing of supply and demand. Even labour, the key cost driver of 2023, is starting to normalise towards more typical inflationary growth. Although skills shortages remain in many specialist trades, contractor capacity has improved and vacancy levels have dipped, slowing earnings growth in the industry.
As we explore in this report, the market is still relatively busy delivering existing orders and workload commitments. Contractors are not yet being compelled to chase turnover. Input cost inflation has eased but labour-related elements and overhead costs are still putting upward pressure on tendering. The heightened risk of supply chain insolvencies will only increase risk aversion among contractors, leading to greater caution when pricing work and agreeing contract terms for profitable work.
We have lowered our previous tender price inflation forecast for 2024 from 2.25% to 2% following some minor adjustments to our regional forecasts. We subsequently anticipate a period of below-average annual inflationary rises, with G&T’s cross-sector, UK average forecast remaining at 2.25% until the end of 2026.
All forecasts in this report take account of all sectors and project sizes as a statistical weighted 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.
The UK economy shrank by 0.1% in the third quarter of last year, putting it on the cusp of a technical recession. Rising interest rates and elevated price levels weighed on consumer spending, which slowed over the period, impacting economic growth. However, the Office for Budget Responsibility, the Government's official economic forecaster, expects growth of 0.1% for the final three months of the year.
Forecasters expect the UK economy to grow by around 0.5% in both 2023 and 2024. We are entering a period of subdued economic growth, as was the case in 2023, however economists’ downbeat outlook may turn out to be overly pessimistic.
Consumer prices rose by 3.9% in November – far lower than the 4.4% annual increase predicted by economists in a Reuters poll, and indicating inflation has fallen faster than expected. Unemployment data has also surprised many, not surging as predicted.
To a certain extent, the UK will remain at the mercy of global economic conditions and geopolitical events, but the shift towards calmer domestic waters could appeal to investors. The prospect of interest rates cuts could also improve the business environment and bolster near-term economic activity. The central bank kept the base rate on hold at 5.25% at December’s meeting, explaining that monetary policy is “likely to need to be restrictive for an extended period of time.” However, the latest slowdown in the rate of inflation has fuelled bets in financial markets that the Bank Rate could fall to as low as 3.75% by the end of 2024, with the first cut speculated to be in the late spring.
Construction Output and New Orders
Construction output – a measure of the value of work being completed on site – has now grown for eight consecutive quarters on the back of post pandemic demand. The rate of growth has slowed in recent quarters due to the increasingly uncertain economic outlook, but managed to rise 0.1% in Q3, reaching a record quarterly high.
The Construction Products Association (CPA), in its latest set of industry forecasts, expect total output across all sectors to contract by 6.8% in 2023 compared to 2022 once official ONS figures have been released. A smaller contraction of 0.3% is forecasted for 2024, driven by slow economic growth hitting the industrial sector and pushing back a recovery in private housing new build and repair and maintenance & improvement. However, according to the CPA, fortunes across different sectors in 2024 will be mixed, with the potential for surprises to the upside if borrowing costs fall and economic growth prospects improve.
New order growth – a measure of the value and volume of new orders received by main contractors – ended its three-month losing streak and rose 3.9% in Q3. However, new orders can be a volatile series and the uptick is unlikely to mark the start of a sustained reversal to the recent downward trend.
Just one sector – Private Industrial – experienced a quarter-on-quarter contraction in Q3 last year (-7.8%), but there was zero growth in both the Commercial and Public Housing sectors, while the Private Housing sector only rose by 0.8% compared to the previous quarter. Infrastructure (+14.2%) and Public Other New Work (+23.7%) experienced the largest rises.
Although bottlenecks, cost pressures on site and supply shortages have eased in recent months, tougher borrowing conditions and access to credit are deterring some clients from committing to new projects. Others are progressing with projects in pre-construction phases, slowing down their progress until market conditions improve in their favour.