UK market intelligence: from contingency to continuity
The UK economy swiftly moved out of recession, construction wage inflation nearly halved and the value of construction new orders surged in Q1. However, against the current backdrop of economic uncertainty, and a UK general election on the horizon this summer, the prospect of change during the life cycle of a long-term project or programme is inevitable.
Our Q2 2024 UK market intelligence report explores how such projects and programmes can be set up to be both robust and responsive in the face of repeated economic and political change. To do so, businesses should recruit the correct technical expertise from the outset and choose an intelligent delivery model with a 360-degree view. Plus, integrate the delivery and commercial models, implement digital tools from programme inception and consider predictive modelling as a means of future-gazing into how their asset might be affected by change throughout its lifecycle.
Economic overview
The Office for National Statistics (ONS) reported that Gross Domestic Product (GDP) increased by 0.6 percent in Q1 2024. This eradicated the contraction in output in both Q3 and Q4 2023, supporting the general consensus in our Q1 UK market intelligence report for a mild and short-lived downturn.
The big contributors to the Q1 GDP growth were services output rising 0.7 percent and the production sector which grew by 0.8 percent, with manufacturing making the largest contribution. Despite these pockets of growth, overall, construction sector output fell by 0.9 percent in Q1.
The Bank of England Monetary Policy Committee’s (MPC) latest announcement saw it leave the bank rate unchanged at 5.25 percent, consistent with market expectations. However, there were indications that the MPC may deliver a first cut in bank rate later in the summer.
Employment fell by 178,000 people over the three months to March, while the unemployment rate rose to 4.3 percent from 4.2 percent as expected. Regular pay growth was unchanged at 6.0 percent, compared with expectations for a fall to 5.9 percent - although the current data does not reflect the impact of the rise in the National Living Wage implemented in April.
Construction overview
Construction output fell by 0.9 percent in Q1 compared to Q4 2023, the same rate of decline recorded in Q4. The quarter-on-quarter decline was mostly driven by adverse weather conditions in February and new works falling by 1.8 percent. Despite this repair and maintenance was up by 0.3 percent.
After five consecutive quarters of contraction, private housing output picked up by 1.3 percent on the quarter. However, with residential output still over a fifth below the Q3 2022 peak, this suggests the sector is still facing high mortgage rates.
The value of new orders grew by 15.9 percent in Q1 2024, compared with Q4 2023. This represents the best performance in new orders year-on-year since Q1 2023. The largest contributor to increased new orders came from private industrial, which surged by 35.3 percent on a quarterly basis in Q1, partly driven by an uplift in the numbers of data centers being built.
Plus, private commercial new orders grew sharply by 27.9 percent during Q1, driven by increased demand for offices, health, and entertainment facilities according to the ONS.
Public new housing fell sharply by 53 percent on the quarter; however, the value of new orders is small meaning that any changes can have a proportionally large impact on what is often volatile data. Housing associations have reduced the construction of new builds, constrained by higher costs and the need to redirect budget towards repairs and upgrading.
Tender price inflation
Despite the economy returning to growth and new orders increasing sharply during the first quarter of the year, construction output contracted for the second successive quarter. However, the forward-looking indicators continue to point to a positive outlook.
The April Standard & Poor Global UK Construction Purchasing Managers’ Index reported activity rising at the fastest pace for 14 months with continued improvement in order books. The survey reported that commercial construction and civil engineering both provided a solid contribution to overall growth.
Although the economy returned to growth in Q1, the outlook for 2024 is still for only a modest improvement. Lower interest rates should bring much-needed confidence to the sector and boost growth prospects; however, the first rate cut might not be until late summer. Given the economic uncertainty we have kept our 2025-2028 real estate TPI forecast unchanged from our Q1 UKMI.
Despite the fact that infrastructure new orders have been weak since the final quarter of 2022, the outlook is brighter with several potential investments in the pipeline. These include the proposals for the water sector's Asset Management Period 8, in the rail sector for the Control Period 7 and the proposed building of Sizewell C nuclear power plant for the energy and natural resources sector. As a result, we expect the infrastructure TPI to remain on the high side at 4.5 percent for 2024, and to 5 percent over the forecast horizon to 2028.
Setting up for success, from long-term to lifetime
In light of the mixed construction outlook for 2024 and a general election only weeks away, businesses responsible for commissioning, construction and operation of long-term projects and programmes must focus on adaptability in their approaches to set them up for success.
The best managed programmes will be robust and responsive in the face of economic and political change - enabling leaders to shift their focus from dealing with individual contingencies to ensuring continuity.
