UK market intelligence: turning pressure into performance

Nitesh Patel Web

Nitesh Patel

Lead Economist, UK

Our UK market intelligence report for autumn Q3 2023 shows economic growth is slowing. Despite reduced demand across the UK construction sector, labour costs continue to increase and, with many contractors facing a simultaneous drop in revenue and a jump in interest payments, the risk of supply chain insolvencies has surged.

These challenges are causing the industry to pause strategic priorities to tackle immediate-term issues, such as net zero; a move which could derail such vital and long-term strategic priorities.

The 0.5 percent monthly rise in Gross Domestic Product (GDP) in June and 0.2 percent on the quarter in Q2 2023 were better than the forecast of 0.1 percent. Public sector strike action has weighed on activity, particularly in services, with output growing by just 0.1 percent in Q2 2023.

But the hike in the Bank Rate from 1.0 percent in June 2022 to 5.25 percent in August has, so far, not caused an economic downturn. In fact, the consensus forecast is for low growth rather than a recession (defined as two consecutive quarters of contracting GDP) despite the sharp rise in interest rates.

Economic overview: volatile inflation and low expansion

Labour market resilience continues to support the economy. Unemployment, at 4.2 percent in June, is still close to a 50-year low. Although the level of job vacancies fell again, it is still above one million and contributing to an annual wage growth of 7.8 percent in the three months to June, up from 7.5 percent in May. Wage growth is now at levels not seen since records began in 2001. 

The fall in annual rate of consumer price inflation (CPI) from 7.9 percent in June to 6.8 percent in July was driven by the lower energy price cap. Goods prices inflation fell to 6.1 percent in July from 8.5 percent in June. However, core inflation, which excludes volatile items such as food and energy prices, remained steady at 6.9 percent. Meanwhile, the annual rate for services inflation, which is a good indicator of underlying domestic inflation, edged up to 7.4 percent. 

With wage growth and services inflation both stronger than expected, markets are pricing in further rate hikes in September. 

The consensus of forecasts is that inflation will remain above the 2.0 percent Bank of England target into 2025, which would mean higher borrowing costs for longer. 

Construction overview: hampered investment

A combination of Brexit, the impact of the pandemic, conflict in Ukraine, the bank rate at a 15-year high to combat the surge in inflation and heightened economic and political uncertainty has hampered the momentum of investment in new projects and dampened investor sentiment.

Amidst these complexities, infrastructure new work output expanded by 6.1 percent, which benefits from a robust pipeline of ongoing projects, albeit with some rescheduling, particularly evident in the rail and road subsectors. The private housing sector, in contrast, is encountering reduced activity in both new work and repair and maintenance, due to the surge in borrowing costs and high inflation.

The commercial sector bore the brunt of the impact of the pandemic and shifting consumer behaviours.

Activity in high street shops remains weak with output 38.3 percent below its pre-pandemic levels and the entertainment sector output is 21.7 percent below level of Q4 2019. On the other hand, the office sector has shown signs of recovery, propelled by the refurbishment and fit out of existing office spaces.

Tender price inflation forecast 

The construction industry is currently confronting a combination of factors, including cost inflation, increased borrowing expenses, escalating material prices and skilled labour shortages. These factors have collectively led to a surge in insolvencies within the sector, reaching the highest count ever recorded since the inception of the measure in Q1 2010. 

The impact of insolvencies is being felt in the market, with specific sectors experiencing more pronounced effects than others. The prolonged duration of challenging financial and economic conditions has led contractors to be more risk-averse, particularly on bigger projects. 

As the construction industry navigates these challenges, adaptability and a nuanced understanding of market dynamics become imperative for sustained success. 

Our tender price inflation forecast remains above target and unchanged from our summer report. Real estate forecasts are 3.7 and 2.7 percent for 2023 and 2024, respectively, and 5.5 and 4.5 percent for infrastructure.

UKMI '23 Auutmn Fig 7 From TPI Forecast
Tender price inflation: Annual percentage changes

Inflation pressures are mixed in the infrastructure sector. While the rescheduling of some projects is cooling the pipelines of work, especially in the rail and road sectors, there are considerable growth areas being seen in other sectors.

The water, environmental resilience, aviation and energy sectors are particularly buoyant, with the upcoming start of the new asset management plan period (AMP8), continued increase in passenger numbers post-COVID-19 and the need to invest in renewable energy.

Saving short-term without compromising long-term goals

With the UK facing an uncertain economic and political future over the next 12 months, it’s tempting for those responsible for built asset programmes to focus solely on their immediate challenges, such as stubbornly high inflation, escalating insolvency risk and construction’s endemic labour shortages.

Clients who throw themselves into firefighting and take their eye off their long-term sustainability goals don’t just risk derailing strategic priorities like net zero. They may also inadvertently reduce productivity and amplify project risk.

While it may be tempting for businesses to solely focus on the short-term issues, they shouldn’t lose sight of longer-term strategic goals, such as net-zero commitments, in doing so. To achieve both hand in hand, astute programme managers should put the right procurement strategies in place, enhance project controls and focus on robust programme management.

Read the full report to see more economic data and insight, and to find out more about tender conditions in the UK.

UK market intelligence report

UKMI Q3 2023 Web Form

For further information contact:

Nitesh Patel Web

Nitesh Patel
Lead Economist, UK