UK market intelligence: Evolving risks, evolving solutions
Our UK market intelligence (UKMI) report for Summer 2022 explores the challenges and outlook for the UK construction industry following a 30-month rollercoaster ride in demand, supply, and project risk and opportunity.
This edition of the UKMI brings mixed tidings in reflection of the marked variance in differing economic indicators. While our analysis finds that inflationary pressures are likely to peak this year before subsiding in 2023, supply chain stress – and the disruptive threat of contractor and sub-contractor failure – is growing.
Economic outlook: an upwards inflationary cycle
Against warnings of recession from the Bank of England, economic activity held out in the three months to May 2022, growing by 0.4 percent.
Inflation, exacerbated by war in Ukraine, rising energy costs and repeated lockdowns in China, is arguably the biggest threat to growth, with rising interest rates another restraint.
In the short term, construction output is likely to weather some of the effects of war in Ukraine. Construction new orders increased by 13.4 percent on the year in Q1 2022 and this committed expenditure may support growth through 2022.
However, the monthly S&P Global / CIPS UK Construction PMI for June 2022 reported the weakest rise in construction output since September 2021, so a slowdown in activity over the coming months is possible.
Tender price inflation forecast
Our central forecast estimates that real estate tender price inflation will increase by 8.7 percent in 2022 on average. This is a slight 0.2 percentage point uplift from our Spring 2022 forecast, where we anticipated an increase of 8.5 percent for 2022.
The UK construction industry is still in an upwards inflationary cycle. However, much of the uplift in 2022 has been felt already, with our inflation forecasts front loaded to the first half of the year. As the economy cools, supply chains stabilise and material cost escalation alleviates, the second half of 2022 is likely to see benign increases.
From inflation to insolvency
Softening client demand and rising inflation may not be the only risks to project and programme delivery. They are increasingly being joined by a more disruptive threat – insolvency.
As build costs have increased, risk allowances have inflated just as credit availability and affordability have fallen. The net effect of this is putting heightened stress on contractors, and this is already evident.
With the threat of insolvency now a constant, efforts to identify and mitigate it should be consistent at every stage of the asset lifecycle. As a key enabler for the UK meeting its net zero targets and addressing regional inequalities, the construction industry needs to get ahead of this challenge to maintain focus on successful delivery.
Read the full report to see more economic data and insight, and to find out more about tender conditions in the UK.