UK market intelligence: Facing the future with confidence
Our UK market intelligence (UKMI) report for winter Q4 2022 explores the overlapping threats posed by a market contraction, and pinpoints where the risks lie and how programmes can become more resilient during the downturn and recover more quickly after it.
With client demand softening and contractor sentiment sliding, 2023 has got off to a challenging start and the prospect of a contraction still looms.
Falling demand should allow tender price inflation to ease back from the high levels seen in 2022, but other threats - from contractor insolvency to the loss of skilled labour - make the outlook far from rosy.
Economic outlook: A bumpy ride
The UK economy slipped into contraction territory during Q3 2022, as Gross Domestic Product (GDP) fell by 0.3 percent on the quarter. However, the start of Q4 2022 brought some respite, with GDP growing by 0.5 percent in October and by 0.1 percent in November.
This resilience is welcome, yet it may be short lived. The economy is sluggish, and GDP shrank by 0.3 percent in the three months to November 2022 compared with the three months to August 2022. Nearly all sectors - except for construction - contributed to the UK’s economic slowdown as well, with production a particular laggard.
While the economic indicators are still giving mixed messages, it’s clear that both the economy and UK construction are entering a sustained period of weakness. Whether the technical definition of a recession is met or not, the softening economy and decline in business sentiment will both pose significant challenges to the construction industry. Meeting those challenges successfully will require careful planning and pragmatic action.
2023 is likely to offer a bumpy ride of variable baseline growth and plenty of statistical revisions. And while a recession may be deferred, it is still probable. When it does arrive, many expect it to be a favourably shallow but prolonged downturn.
Tender price inflation forecast
With the UK economy softening, it is tempting to assume that tender price inflation will fall as client demand cools. But while past precedents suggest this is likely, it is by no means assured. Despite superficial similarities, recessions are seldom identical, and those preparing for the current downturn need to examine its specific circumstances to identify how they will be impacted.
In the face of rising borrowing costs and the uncertain economic outlook, current forecasts offer few grounds for optimism when it comes to demand.
Reaching for resilience
However long or severe the softening of the market is, it will present a new and complex set of challenges for those leading capital investment programmes.
Optimists point out that economic contraction may finally break the inflationary cycle that has dogged the construction industry ever since the post-pandemic surge in demand began two years ago. But even this prospect may amount to a fleeting tonic.
The chronic shortage of skilled labour, coupled with stubbornly high materials costs, means inflation will remain a clear and present danger in the short term. During 2023 contractor insolvency - and with it the risk of project disruption - is likely to rise, and in the long-term productivity and innovation could fall.
Read the full report to see more economic data and insight, and to find out more about tender conditions in the UK.