Our Forecasts

Our Forecasts

A mixed outlook of slow economic growth, inflationary pressure and shifting policy dynamics are holding back growth in the sector. Constrained supply, regulatory burdens and heightened risk aversion continue to drive tender prices in the short term.

A much-hoped-for recovery in the construction sector has been stalled by a challenging economic and political backdrop. With inflation in the economy expected to remain above target this year, interest rate reductions may proceed at a slower pace, deterring investment and delaying project pipelines. The recent decision to raise employers’ national insurance contributions (NIC) has further weighed on business confidence, adding to labour cost pressures at a time when wage growth in the industry remains above trend.

Supply chain capacity constraints, regulatory burdens and heightened risk aversion also continue to shape market dynamics. Contractors, particularly large Tier 1 contractors, remain selective in bidding, pricing in risk amid prolonged project lead times and increasing compliance requirements. While materials cost inflation remains relatively static, labour shortages and regulatory-driven overheads are keeping tender prices elevated. As a result, inflationary pressures in the sector are expected to persist.

Despite these headwinds, pockets of the industry remain cautiously optimistic. CPA forecasts continue to anticipate a rebound in overall output in 2025, and although viability concerns have stalled projects in certain areas, demand remains strong in infrastructure, energy and refurbishments markets.

Our UK weighted average tender price inflation forecasts for 2025 and 2026 remain unchanged from last quarter at 2.75%. However, a slower-than-expected start to the year could affect the inflationary outlook, particularly if public sector work takes longer to ramp up. We also anticipate significant variations in tender pricing between different sectors. Those sectors where workload growth is weak will see increases in competitive pressure and softer levels of tender price inflation.

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 Economy

Economic growth in the latter half of 2024 slowed notably, with GDP growing by approximately 0.8% for the year—a modest figure reflective of elevated interest rates, persistent inflation and weakening consumer and business confidence.

The outlook for 2025 has deteriorated further, with the Bank of England (BoE) slashing its growth forecast to 0.75%, down from 1.5% in November 2024. The Bank warned that the economy is likely to skirt a technical recession by only the narrowest of margins. It also highlighted that the recent increase in employer National Insurance contributions will place additional strain on both job creation and prices.

Following the BoE’s downbeat assessment, concerns over stagflation—the challenging mix of weak growth and high inflation—have resurfaced. Inflation is projected to peak at 3.7% in Q3 2025, primarily due to rising energy costs, before easing to around 2.5% in 2026 and returning to the 2% target in 2027. Despite inflationary pressures, the BoE cut interest rates from 4.75% to 4.5% in February 2025, marking its third reduction in six months. The decision underscores the Bank’s growing concerns over faltering economic momentum, with business investment and consumer spending showing signs of strain. However, it also highlights the difficult balancing act of supporting growth while ensuring inflation remains under control.

Despite these headwinds, underlying price pressures are expected to ease over time. The Consumer Price Index (CPI) fell unexpectedly to 2.5% in December 2024, but it remains above the BoE’s target and is likely to hover above 2% for much of 2025. A decline in services inflation—often viewed as a key indicator of domestic price trends—was a welcome development. However, rising employment costs, a higher minimum wage and increased government spending could exert renewed upward pressure on prices. Additionally, protectionist trade policies from the new US administration pose a threat, particularly if tariffs on key trading partners disrupt global supply chains, drive up commodity prices, and increase costs for UK businesses and consumers.

These economic uncertainties are affecting the construction sector. In January 2025, the UK Construction Purchasing Managers’ Index (PMI) contracted for the first time in nearly a year, signalling weaker industry activity. Shrinking order books and rising cost pressures contributed to the weakest business confidence levels since October 2023. Output declined across all major sectors, with reports of subdued workloads and delayed decision-making by clients. Growth prospects remain dependent on infrastructure investment and green energy projects, but weaker planning approvals in 2024 raise concerns over the long-term pipeline.

Construction Output & New Orders

Construction output – a measure of the value of work being completed on site – fell 0.2% in December 2024. New work output rose 1.1%, while repair and maintenance (R&M) work contracted by 1.8% compared to the previous month.

Sectoral performance remains uneven. Despite an improvement in December, private residential construction remains weak due to affordability pressures, high mortgage rates and a sluggish housing market. Infrastructure output is also subdued due to project delays and funding constraints. Housing repair and maintenance declined further, likely reflecting cost-of-living pressures.

In contrast, private commercial construction activity on the ground remains strong, buoyed by stronger investment in office refurbishments, retail fit-outs and repurposing of underutilised commercial space. Public sector new work (excluding infrastructure) also saw modest growth, supported by higher government spending on education, healthcare and civic projects.

Looking ahead, industry forecasts suggest construction is set for a more gradual recovery following two challenging years. The Construction Products Association (CPA) expects construction output to grow by 2.1% in 2025, followed by a further 4.0% increase in 2026, driven by lower interest rates, improved developer confidence and government-backed infrastructure projects.

New construction orders fell by 2.4% in Q4 2024, reaching £9.3 billion, a further sign of weakening demand. Most sectors saw annual declines, with only public other new work and commercial construction showing growth (+1.4% and +15.1%, respectively). The strong growth in commercial construction indicates continued investment in areas like office space, while the growth in public other new work reflects government spending in areas outside of traditional infrastructure. Notably, private housing work surged 24% Q-on-Q, suggesting developers are anticipating increased demand due to lower interest rates and planning policy changes.

The outlook for new order growth remains closely tied to the timing and scale of interest rate cuts. Lower borrowing costs could help revive stalled projects, particularly in the residential sector, while planned government infrastructure investment may offer a near-term boost. However, challenges persist—uncertainty surrounding planning reforms, Tier 1 contractor capacity constraints and ongoing labour shortages could still weigh on recovery prospects.