Are there any reasons for the construction industry to be optimistic? The Bank of England’s Monetary Policy Committee (MPC) recently forecast that gross domestic product would not fall this year and would grow slowly over the next two years, buoyed by growth in world GDP. 

Joe Martin

Joe Martin

Total output in construction will fall in 2023 but all sectors except housing will see some growth.

BCIS forecasts a challenging period ahead for the construction industry. New work output is one of the more volatile sectors as it is directly related to levels of investment. With the current economic headwinds – as well as the few incentives for developers to invest within the UK construction industry – new work output is expected to decline going forward. Our forecasts suggest that new work output will not return to the pre-crisis levels (which peaked in 2017) until the end of 2027. That’s 10 years of no real growth in the sector, a lost decade.

There is some good news among the bad. While most sectors within the industry are expected to stagnate or decline, the repair and maintenance (R&M) sector, after a small fall in 2023 (although still well above pre-pandemic levels), are expected to grow to unprecedented levels thereafter.

This will be driven to a large extent by the government toughening health and safety regulations, in the wake of the Grenfell inquiry and Awaab’s Law. Most recently, a government-commissioned independent review into construction product testing will put increased pressure on cladding companies to fix unsafe buildings. Carbon reduction requirements will also require upgrades to many buildings and some of this work will fall into the R&M sector.

A significant fall in output is expected in the housing sector, particularly private housing. Private commercial and private housing show some signs of recovery towards the end of the forecast period (2028) but will remain below their previous peaks. In fact, the private commercial sector is still recovering from the fallout of the financial crash in 2008 – this has been exacerbated by a decrease in demand for retail and office space since the pandemic.

In the current market, there appears to be an oversupply of both new residential and commercial properties that are finished but not yet sold – therefore, it makes sense for property developers to rein in activity to maintain margins and shareholder returns.

Infrastructure is the only sector forecast to exhibit sustained growth over the next five years and will remain above pre-crisis levels. However, some projects could be delayed due to inflation, which has been witnessed already in the recent government interventions in the HS2 and Lower Thames Crossing projects.

The danger of this knee-jerk approach is that the projects will inevitably cost more in the long term due to budget erosion, caused by inflation – a view also taken by the National Audit Office (NAO).

On the downside, there is a risk that the government could cut the budgets for the National Infrastructure and Construction Pipeline in its autumn review.

Although material cost increases have been at their highest since the 1970s, the availability of materials and products is now back to pre-crisis levels, as product supply continues to improve. While inflationary pressures are predicted to persist this year, the improved availability of most materials should help offset the worst extremes of price volatility experienced in 2022.

With some stability returning to costs and prices, building costs are predicted to lead tender prices in the near term, as demand softens, before prices marginally lead costs at the end of the forecast period. In terms of tender prices in 2023 and 2024, a fall in demand will result in fewer opportunities and a greater keenness to tender.

The supply chain will manage or absorb some of the pressure from site wages, so that the TPI will increase more slowly than the cost index.

Lead-in times for materials are back to pre-Covid levels. Clients and their design teams have become more flexible in accepting substitute products. However, while cost pressures have abated on commodity-based goods, it is increased on goods and products that are energy intensive in their production.

Therefore, there is still likely to be some price volatility in these, although materials costs, overall, are generally stabilising.

The combination of ingrained shortages with high inflation is likely to push up wages over the next two years. It remains to be seen if recent measures in the spring Budget – such as adding five construction roles to the shortage occupations list – will make a substantial difference.

In addition to this, the 60% increase in business insolvencies in 2022 (compared with 2021) could create further problems in the future, affecting capacity to deliver projects – especially if demand conditions improve – as we’ve forecast for 2028.

Recent estimates based on Office for National Statistics figures suggest that inflation in construction has added about £24bn to annual construction output costs between 2019 and 2022. This is a significant problem that needs to be addressed by refreshing budgets for major investments.

Joe Martin is lead consultant at BCIS