UK market intelligence: from inflation to inflection point
With political uncertainty easing after the 2024 general election, the UK economy is returning to growth. The long-anticipated cycle of interest rate cuts has begun, and business sentiment is steadily improving.
Despite the cooling of tendering conditions and general weakness of the construction sector, it's still far from a buyer’s market. Businesses will need to be careful about how they manage risk to deliver major programmes successfully.
Our Q3 2024 UK market intelligence report examines several procurement challenges, such as increasingly selective contractor capacity constraints, market competition and funding public sector projects. It also covers the extent to which these challenges can be effectively mitigated, from the business case stage through to construction and into the asset lifecycle.
Economic outlook
Looking forward, the consensus is for gross domestic product (GDP) to expand by 0.9 percent in 2024 and 1.3 percent in 2025. This represents significant growth compared to the GDP increase of just 0.6 percent in Q2.
The Standard & Poor’s Global UK Output Purchasing Managers’ Index rose to 53.2 in August from 52.8 in July, indicating a solid upturn in private sector activity, an encouraging start to the second half of the year.
UK annual consumer price inflation (CPI) increased from 2.0 percent in June to 2.2 percent in July, which was below forecasts. Core CPI (excluding food and energy) fell from 3.5 percent to 3.3 percent, and services inflation dropped from 5.7 percent to 5.2 percent. Although both measures fell more than expected, they remain well above the Bank of England’s 2.0 percent inflation target.
Construction output
Construction output decreased by 0.1 percent in Q2, driven solely by a 0.5 percent decline in new work. However, repair and maintenance (R&M) provided some support, growing by 0.4 percent.
The largest contributor was non-housing repair and maintenance, which increased by 3.0 percent annually. In contrast, total housing R&M fell by 2.2 percent in Q2 after strong growth the previous two quarters. Other positive contributors included other new public work, private commercial and industrial work.
Annual output fell by 1.0 percent, with significant declines in infrastructure (10.6 percent), private new housing (8.4 percent), industrial (7.2 percent) and public new housing (6.8 percent). However, non-housing R&M grew by 7.3 percent, and private housing R&M by 6.8 percent.
The private commercial sector also saw growth, driven by fit-outs, data centres and life sciences. In the first half of the year, new projects and on-site starts declined due to pauses in public sector and government investment ahead of the 2024 General Election.
Tender price inflation
The UK construction industry is experiencing a cautiously optimistic outlook. While material prices are still high, despite recent dips, and labour shortages remain a challenge, there is a positive shift in sentiment.
While confidence continues to improve, the key indicators that drive tender price inflation forecasts have not changed materially since the last review. As a result, we have kept our forecast unchanged from the 2024 Q2 UK market intelligence report, with real estate and infrastructure landing at 3.0 and 4.5 percent, respectively.
Balancing inflation and insolvency risk
This report highlights that programme delivery continues to suffer from acute labour shortages, reflecting the importance of establishing the right commercial models. The capacity crunch and contractors’ cautious and selective approach to new work, combined with ongoing cost challenges, remain to put pressure on viability despite lowering inflation and interest rates.
Businesses must therefore aim for more equitable transfers of risk and encourage the procurement of partners to enable better quality bids and enhance the working relationship with the supply chain. Contracting directly with second tier suppliers could also improve visibility and control costs, while incentivisation may also boost performance.
