Our Forecasts

OUR FORECASTS

The UK construction sector enters mid-2025 with significant uncertainty and a mixed inflationary backdrop. Despite some easing in materials costs and signs of stabilising input inflation, tender pricing remains under upward pressure due to structural labour constraints, rising compliance costs and selective contractor behaviour. Delays in project conversion, a softening economic outlook and policy-driven cost escalations are compounding market fragility and limiting the pace of recovery.

Economic forecasts have weakened amid geopolitical and trade policy pressures: the Bank of England now expects GDP to grow by just 1% in 2025, with inflation set to remain above target until 2026. Although base rate cuts are underway, monetary easing is expected to proceed cautiously, and confidence-sensitive sectors—particularly residential and private commercial—remain subdued. Public sector workloads are providing a degree of stability, particularly in infrastructure, healthcare and regulated utilities, but delivery remains slow and funding pipelines inconsistent.

Contractors continue to adopt a defensive posture. Our latest TPI survey suggests that Tier 1 and Tier 2 firms are prioritising risk management over volume, pricing in prolonged lead times, wage inflation and delivery risk. While some sectors are experiencing increased competition, this is largely reflective of reduced opportunity volumes rather than a return to aggressive bidding. Capacity is constrained in specialist trades and retrofit sectors, while overhead recovery pressures are pushing preliminaries higher—particularly on complex or labour-intensive projects.

Input cost data points to ongoing pressures: wage growth in construction remains above 7% year-on-year, even as vacancies fall. Regulatory burdens—particularly those linked to the Building Safety Act—are adding to preliminaries costs, and overheads are being held nominally flat despite rising delivery costs. Although materials inflation has stabilised, the sector continues to experience volatility in specific product lines due to regulatory uncertainty, logistical disruption and short-term trade policy shifts.

Against this backdrop, we have revised our UK average Tender Price Inflation (TPI) forecasts to 2.25% for 2025 and 2.5% for 2026. These figures reflect a softening outlook relative to earlier expectations, shaped by weaker project flow, patchy demand recovery and an increasingly bifurcated pricing environment. As ever, project-specific factors—such as procurement route, location and contractor appetite—will remain key determinants of actual pricing outcomes.

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

Despite a reported 0.7% GDP growth in Q1 2025, economists caution that this figure may overstate the underlying economic momentum. Analyses suggest that the surge was influenced by temporary factors, such as inventory build-ups ahead of anticipated US tariffs, rather than sustained demand increases. Consequently, the Bank of England has revised its growth forecast for 2025 down to 1%, with the EY ITEM Club projecting an even lower 0.8%, reflecting a significant downgrade from earlier expectations of a robust post-inflation recovery. For the construction sector, this subdued economic outlook implies potential challenges, including weaker project pipelines and cautious client investment decisions, contrasting sharply with the optimistic projections at the year's outset.

Uncertainty surrounding the impact of US trade policy on the global economy has clouded the UK growth outlook. Though the recent US-UK bilateral trade agreement offers some relief—eliminating tariffs on British steel and aluminium exports—the agreement's limited scope means that a 10% tariff continues to apply to most other goods. This poses risks to UK exporters and could dampen overall economic growth. Although the deal benefits specific sectors, its broader economic impact is expected to be minimal, leaving the UK economy vulnerable to ongoing global trade tensions.

Inflationary pressures are easing but remain uneven. Headline CPI fell to 2.6% in March, driven by lower fuel prices and softening goods inflation. However, core and services inflation remain sticky—services inflation is still running at 4.7%—underpinned by strong wage growth and persistent labour shortages. April’s increase in regulated energy bills, the near-7% rise in the National Living Wage and higher employer National Insurance contributions are expected to reintroduce upward pressure. This uneven picture—brief respite in headline figures but stubborn core and services inflation—underscores the Bank of England’s dilemma between taming price growth and supporting a fragile economy.

At its May 2025 meeting, the Bank of England cut interest rates from 4.5% to 4.25%, citing easing inflation, sluggish business investment and mounting global uncertainty—particularly the fallout from new US tariffs on UK exports. While the Bank sees these trade developments as broadly disinflationary, strong domestic wage growth continues to fuel price pressures. Inflation is expected to peak at 3.5% this summer before easing towards the 2% target by early 2027. Policymakers remain split and further rate cuts are likely to be slow and data-dependent, with the MPC reaffirming a “gradual and careful” approach to monetary easing.

The S&P Global UK Construction PMI – a measure of overall activity – remains firmly in contraction territory, highlighting ongoing industry uncertainty. Contractors report shrinking order books, elevated cost pressures and clients delaying or postponing project decisions in light of mixed economic signals and uncertain policy pathways. This combination of subdued demand, elevated costs and worries about the economic outlook is squeezing activity across all construction sectors.

CONSTRUCTION OUTPUT & NEW ORDERS

UK construction output was flat in Q1 2025, holding steady at £53.2 billion (seasonally adjusted). This marks the third consecutive quarter of stagnation, reinforcing the view that activity has plateaued at a historically high—but no longer rising—level. The figures highlight the persistent challenges in converting a strong pre-construction pipeline into on-site delivery, with labour constraints, planning delays and a fragile macroeconomic backdrop continuing to limit the volume of work progressing to execution.

By contrast, new order values jumped 26.6 % to £11.6 billion, the second-strongest reading since the end of 2022. The rebound was led by infrastructure, where contract awards more than doubled quarter-on-quarter. Private industrial work also staged a strong recovery, climbing nearly 39% as manufacturers and logistics operators advanced energy-efficiency retrofits and capacity upgrades. Private-commercial orders rose more modestly, by 8%, while private housing saw a further 7% decline, underscoring developers’ ongoing reluctance to commit amid high financing costs and soft demand.

Taken together, the data sketch a two-speed picture: large, capital-intensive schemes—predominantly infrastructure and complex industrial retrofit—are sustaining order books at the top tier, while lower tier contractors contend with weaker pipelines. The residential sector, in particular, remains subdued, with the flow of new work still receding.

Because major infrastructure and industrial projects take months to mobilise, the Q1 rebound in orders is unlikely to translate into higher output before late 2025. A broader upswing will depend on improved access to finance, greater policy certainty and easing pressure on construction capacity.

For now, the data depicts a sector in transition: order books have lifted, but in a narrow, infrastructure-led band and real output growth remains elusive—waiting on cheaper finance, clearer policy and reliable workforce capacity before the recovery can broaden and take hold.