Our Forecasts

OUR FORECASTS

Buoyed by positive sentiment indicators and a pro-construction budget, the UK construction industry appears poised for growth.

The Labour Government’s first Budget confirmed ambitious capital spending plans of £100 billion, significantly boosting demand for construction services. While infrastructure and housing are poised for the most substantial uplifts, other sectors are also expected to benefit. The Government’s focus is clearly on investment, demonstrating strong intent, but the real challenge lies in effective delivery.

Planning delays, regulatory capacity issues, skills shortages and a constricted contractor market are significant challenges the Government must navigate to achieve its targets. Effective planning reform will be crucial for streamlining processes and alleviating bottlenecks, but their implementation will take time. In the interim, an uptick in construction activity may further strain the planning system, exacerbating existing backlogs. Additionally, delays in the Building Safety Act’s Gateway 2 process, attributed to limited regulatory capacity, add to the mounting pressures facing the sector.

Perhaps the biggest obstacle to growth though is a shrinking supply chain. While recent data suggests insolvencies may be peaking, they remain at elevated levels. The recent wave of contractor insolvencies, including that of ISG, is likely to create a lagged ripple effect throughout the supply chain, intensifying existing financial pressures on specialist sub-contractors and further reducing market capacity. Compounding these challenges is the ongoing skills shortage, a persistent issue that becomes more critical as construction activity ramps up. Demand for skilled labour is expected to outstrip supply, exacerbated by demographic shifts and diminished access to skilled migrant workers. This will consequently exert additional upward pressure on labour costs.

Although annual inflation rates for construction materials are declining, rising activity poses a significant upside price risk. Material costs remain elevated and slight increases in recent months signal potential upward pressure as demand strengthens. With interest rate relief expected, the easing of financing pressures could enhance project viability, potentially driving a wave of new starts and the restart of previously paused projects. This scenario could drive further price hikes as market conditions tighten and demand for materials outpaces supply growth.

Amid mounting inflationary pressures, tightening supply-side capacity, and an upswing in growth, we expect tender price inflation to rise modestly. In response, we have raised our UK average forecast by 25 basis points to 2.5% for 2024, with projections reaching 2.75% for both 2025 and 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 ECONOMY

The International Monetary Fund (IMF) has raised its growth forecast for the UK, anticipating a 1.1% expansion in 2024, followed by 1.5% growth in 2025. Though modest by historical standards, this growth would place the UK among the better-performing economies within the G7. Government plans for increased public investment—bolstered by an additional £100bn in capital spending over the next five years—are expected to support near-term growth.

The Budget's commitment to increased capital spending is designed to “kickstart economic growth” in the near term. Yet, with this expansionary approach comes the risk of fuelling inflation just as CPI trends downward. Higher public investment may drive GDP growth, but it could also add pressure on the Bank of England (BoE) to keep interest rates higher for longer to avoid reigniting inflation. The Office for Budget Responsibility (OBR) now projects that inflation will average 2.6% in 2025, which has led markets to temper expectations of rapid rate reductions. If inflation remains above target, the BoE may be forced to exercise caution in cutting rates, tempering the expected stimulus effect from the Budget.

Additionally, external pressures such as geopolitical uncertainties and potential disruptions to global trade add further risk, especially to the cost of imported goods. Trade tensions or supply chain disruptions could push import costs higher, counteracting gains made by slowing domestic inflation. Another potential factor that may affect the growth outlook is labour market dynamics. Above trend wage growth, if it continues, could sustain inflationary pressures, impacting consumer prices and thereby influencing the BoE’s monetary policy stance. In combination, these factors make the Budget's growth ambitions vulnerable to both internal inflationary challenges and external global pressures.

Headline inflation has been cooling faster than central banks had anticipated, with the UK’s CPI dropping to 1.7% in September. This marks the lowest level in three years, positioning inflation well below the Bank of England’s 2% target. All the main categories cooled in September, including ‘services’ inflation – which the BoE views as the most important gauge of domestically-generated price pressure. However, given the fiscal loosening announced in the Budget, the BoE is likely to approach rate cuts with caution. Rapid easing of rates could risk reversing recent progress on inflation, rekindling pressures that policymakers are eager to keep under control.

While the Budget may help to boost near term growth, the UK’s economic trajectory remains highly contingent on external and domestic pressures. Corporate debt remains a significant vulnerability, as many firms face the challenge of refinancing at elevated interest rates. Insolvency risks, especially within sectors reliant on high leverage, could weigh heavily on growth prospects. The BoE’s balancing act between fostering growth and controlling inflation will thus continue to be a central theme in the months ahead.

CONSTRUCTION OUTPUT & NEW ORDERS

Construction output – a measure of the value of work being completed on site – increased 0.4% in August. New work output rose 1.6%, while repair and maintenance (R&M) work decreased by 1.0%.

At the sector level, five out of the nine sectors grew in August 2024 - the main contributors to the monthly increase were private housing new work and private commercial new work, which grew by 3.4% and 2.2% respectively. The biggest drags on growth were non-housing R&M (-2.2%) and public new housing (-2.1%).

The 1% rise in construction output in the three months to August was largely attributed to favourable weather and improved economic sentiment. Expectations of falling inflation and easing interest rates may have boosted confidence, particularly in private sectors. The Government’s pro-build stance is also likely contributing, as developers anticipate supportive policies and increased capital spending on infrastructure. This positive policy environment could accelerate delivery and encourage developers to restart projects previously on hold.

Despite the latest uptick in output, the Construction Products Association (CPA) forecasts a -2.9% decline in total UK construction output for the year compared to 2023. However, optimism remains for a U-shaped recovery, with output projected to rise by 2.5% in 2025 and 3.8% in 2026.

Equally, there are several downside risks to growth. Persistent high insolvency rates may constrain market capacity to deliver projects. Additionally, Gateway 2 delays on higher-risk buildings—due to heightened scrutiny, documentation requirements and checks—could slow project timelines. A renewed surge in demand-led material price inflation could also affect project viability and stall output growth.

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 decline further 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. Indeed, the latest S&P Global UK Construction Purchasing Managers’ Index (PMI) report pointed to a continued expansion of new order growth in October, with many noting strong sales pipelines and tender opportunities linked to generally improving domestic economic conditions. This bodes well for ONS new order data in the second half of 2024.