Our Forecasts

OUR FORECASTS

As interest rate cuts and anticipated planning reforms spark hopes for a construction revival, will inflationary pressures resurface and how will contractor capacity constraints restrict future workload growth?

The outlook for the UK construction sector has brightened in recent months. With election-related uncertainty behind us and borrowing conditions set to gradually improve, the stage may be set for an expansion in construction activity. As confidence begins to return, we could witness a renewed momentum in project starts. However, challenges remain.

A resurgence in activity may drive up costs across the supply chain, as materials, labour and contractor availability become increasingly constrained. The intensified competition for resources could lead to upward pressure on tender prices, especially in areas where capacity is already stretched thin

As the market heats up and optimism translates into tangible growth, these constraints and pressures could lead to an inflationary spike. After a brief period of stability, material prices are once again on the rise. Recovering global demand is allowing manufacturers to catch-up with historical input cost inflation, passing on price increases. Labour pressures, which have eased in tandem with weaker growth in new orders and subdued demand in several sectors, could reemerge. The industry continues to grapple with a shrinking labour pool due to demographic trends and reduced access to skilled migrant labour, prompting concerns about the market’s capacity to support a recovery. This is coupled with the loss of contractor capacity through business failures and insolvency which will reduce competitive pressure in the market and extend delivery times.

Given this backdrop, we have adjusted our short-term inflation forecast for 2024, increasing it from 2.00% to 2.25% for both London and the broader UK market. We expect further inflationary pressure in 2025 as the anticipated recovery gains momentum, with spikes in key trades and certain sectors as projects currently in a holding pattern move forward. G&T has therefore raised its UK average TPI forecast for 2025 from 2.25% to 2.50%, and its London forecast from 2.25% to 2.75%. Beyond this, forecasts are subject to a significant degree of uncertainty and reflect our long-term average.

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

The UK economy grew 0.6% in Q2 – further extending the recovery from last year’s recession. This brings total growth for the first half of 2024 to 1.3%, putting the UK on track to enjoy the strongest growth within the G7 group during this period.

At the start of 2024, forecasters were expecting a tepid annual growth rate of just 0.5%. However, the consensus view has now been bumped up. Some economists attribute this unexpected growth spurt to the so called ‘catch-up’ effect, following on from the short and shallow technical recession we had in second half of 2023. The mild downturn left the economy with underutilised capacity, as it grew by only 0.1% last year—well below its potential. This untapped capacity is now being activated, driving stronger growth and underscoring the power of the catch-up effect.

Another positive economic development has been normalising Consumer Price Inflation (CPI). After falling back to the Bank of England’s 2% target in June, the headline inflation rate edged up slightly to 2.2% in July. Although an increase was expected, it was somewhat tempered by a decline in certain underlying price pressures, particularly in services inflation, resulting in a smaller rise than initially feared. With inflationary pressures gradually easing, the Bank of England has begun cutting interest rates, a move that should help stimulate economic growth. However, the central bank’s decision was finely balanced, as the risk of renewed inflation remains. The bank expects CPI to temporarily rise to around 2.8% later this year, as last year’s declines in energy prices fall out of the annual comparison, revealing more clearly the “prevailing persistence of domestic inflationary pressures”. The bank will therefore exercise caution in not cutting rates too much or too quickly.

CONSTRUCTION OUTPUT & NEW ORDERS

Construction output – a measure of the value of work being completed on site – fell 0.1% in Q2. This was the third consecutive quarter of contraction. The drop in Q2 came solely from a decrease in new work (-0.5%), as repair and maintenance output increased by 0.4%.

Spending decisions in Q2 were reportedly impacted by election-related uncertainty, along with the persistent effects of high interest rates and elevated construction costs, delaying project starts. The ONS also noted that inclement weather affected output growth, though with mixed results. While rain delayed work early in the quarter, warmer weather in June led to increased output in some areas. With total output rising in both May and June, the trend is moving in the right direction. The market remains cautiously optimistic that this will continue, supported by the new government’s planning reforms and housing delivery targets. Historically, construction has fared well under a Labour Government.

The Construction Products Association (CPA) continues to forecast an overall contraction in output growth this year (-2.9%) but remains optimistic of a U-shared recovery, with output expected to grow 2.0% in 2025 and by 3.6% in 2026. Driving the CPA’s outlook is post-election stability benefitting economic activity, spending and investment. The prospect of further interest rate cuts, a recovery in the housing sectors and hopes that planning constraints will ease and draw more private investment also support their outlook.

Meanwhile, new order growth – a measure of the value and volume of new orders received by main contractors – surged for the second consecutive quarter, climbing by 16.5% to reach £12.5 billion.

The quarterly increase was primarily driven by significant growth in new private commercial and infrastructure work, which rose by 15.2% and 23.5%, respectively. Notably, all sectors experienced quarter-on-quarter growth – the first time this has happened for several quarters.

As interest rates start to decline and the new Government's pro-construction policies and ambitious housebuilding targets take effect, we can anticipate a continuation of the positive new order data over the coming quarters. The critical challenge ahead lies in expanding capacity and tackling the skilled labor shortages that threaten to constrain the industry's ability to manage this surge in demand.