The Bank of England has recently warned of a possible sharp economic slowdown, with inflation possibly hitting more than 10% by the end of the year. Recent official figures show that the UK economy has been shrinking, in March and again in April.
Earlier this year, construction industry forecasters were celebrating buoyant levels of activity. Now they are downgrading forecasts. Conclusions about the extent of this downgrade for the industry vary.
An uncertain economic future
“The major challenge is creeping uncertainty,” sums up Noble Francis, Economics Director at the Construction Products Association (CPA).
“Current inflationary pressures, if sustained, will have an increasingly depressing impact, while the continuation or potential escalation of conflict in Europe presents an existential risk.”
The CPA is predicting a 2.8% growth in construction output for the year. This would normally be seen as a very healthy figure, but this is a sharp revision from the 4.3% growth forecast three months earlier.
Private housing repair and improvement - a mainstay of many small practices – is the sector it sees as most exposed to a combination of price inflation, falls in consumer confidence and pressures on household incomes.
In this sector, output is expected to fall by 3% in 2022 and 4% next year from current highs. However, private housing output more generally is expected to rise 1% this year and next.
The latest figures from Glenigan, which tracks project commencements, found a growth of nearly 10% in the value of starts in the three months to May. This survey tracks all starts on site, excluding major projects valued at more than £100m.
Non-residential work starting on site fell 4% during the three months to May, a drop of 6% over the year. Residential starts were up 24% compared to the preceding three-month period, although this was 25% less than the same period in 2021.
The uptick in starts has exacerbated shortages in building products and manpower and pushed up already high materials prices.
The RIBA Business and Career Resilience Hub
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The hub contains a comprehensive package of practical advice, including topics such as:
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Identify the threats and opportunities that will challenge your business tomorrow, in six months' time or in five years' time
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Essential money management tips, such as 13-week forecasting and dealing with late invoices
- Where to find free business resources
A guide to the UK's best free business services, funding and grant opportunities, and one-to-one advice
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Everything that a simple P&L statement should include in order to transform your practice's relationship to profitability
- Giving your practice a thorough business health check?
Diagnose your practice's weak spots and draw up a purposeful business plan
- How to stay profitable when projects are onsite
Tips on managing fixed or hourly-rate fees, clients, and protecting crucial profit margins
- Working out your break-even point when calculating fees
How to assess your practice's time and resources to ensure the fee fits the project
Price surges in materials
Tender price forecasters continue to revise their forecasts upwards. Consultant Mace has revised its tender price increase for 2022 to 8% in its Q2 2022 Market View, up from 5.5% three months earlier.
Matt Fitzgerald, Commercial Director of Mace Cost Consultancy, suggests that the industry is experiencing high near-term inflation driven by price surges in energy costs and key construction materials. He warns that making tender price predictions has become very challenging, and will remain so until it is clear how and when central banks will react to manage interest rates to rein in inflation.
In its Summer Market View, Arcadis is broadly in line with Mace, predicting that tender price inflation will peak at 8-10% in London and the regions this year. The impact of the war in Ukraine alone, through higher energy prices, has added 3-5% to the cost of typical projects.
Arcadis is predicting that prices will remain high until the UK and European energy markets are retooled to be less dependent on Russian gas and oil. Higher prices and difficulties in reaching acceptable terms will lead to an increasing number of projects being delayed. Over time, these delays will lower demand until a more competitive market can be re-established.
Text by Neal Morris. This is a Professional Feature edited by the RIBA Practice team. Send us your feedback and ideas
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First published Thursday 23 June 2022