UK market intelligence: from the Budget to build
In this UK market intelligence report, we delve into the economic, construction and tender price landscapes while emphasising the critical shift towards a more collaborative approach across the sector.
The Chancellor’s Autumn Budget 2024 sets the stage for transformative change with a £100bn investment in infrastructure, real estate and energy and natural resources over the next five years. This ambitious programme, aimed at bolstering economic growth and improving living standards, presents both immense opportunities and significant challenges for the construction industry.
Economic overview
Economic momentum slowed considerably in Q3, with GDP growth at 0.1 percent, missing the 0.2 percent forecast. This was driven by gains in construction (+0.8 percent) and modest growth in services, offset by a contraction in production (-0.2 percent).
Inflation also rose, reaching 2.3 percent in October, driven by higher energy price. Despite the anticipated cooling of inflation post-2025, forecasts indicate continued pressures above the 2.0 percent target.
The Bank of England reduced the Bank Rate to 4.75 percent in November but cautioned against aggressive cuts to avoid reigniting inflation. Unemployment rose slightly to 4.3 percent, and wage growth remains robust at 6.5 percent, particularly in the construction sector.
This mixed economic outlook underpins both opportunities and risks tied to the government’s ambitious spending plans.
Construction overview
The construction sector output grew by 0.8 percent in Q3, reversing declines seen in previous quarters. Gains were led by new work, particularly in private industrial and infrastructure, while repair and maintenance saw slight declines across sub-sectors.
New orders fell sharply by 22 percent in Q3, with steep declines in private housing and commercial new work. Infrastructure provided a rare bright spot with a modest 0.8 percent uptick.
The disappointing data reflects pre-Budget uncertainty but anticipates a rebound as newly announced projects gain traction. Notably, challenges such as high material costs, skilled labour shortages, and the aftermath of recent contractor insolvencies persist.
Tender price inflation
Tender price inflation (TPI) is expected to rise due to growing demand and constrained supply chain capacity. Infrastructure projects supported by Budget commitments are expected to sustain TPI at 4.5 percent in 2024, rising to 5.0 percent by 2028. Real estate TPI is forecast at 3.0 percent in 2024 and 2025, with potential growth thereafter as lower interest rates stimulate activity.
Construction input costs remain elevated, with labour shortages and wage inflation exerting upward pressure. Skilled trades are commanding premiums, and rising National Insurance contributions in 2025 will further strain contractors’ margins, heightening insolvency risks.
Meanwhile, contractors report growing reticence to bid for complex projects, favouring simpler undertakings to mitigate risks.
Industry collaboration key to delivery
Delivering the £100bn pipeline will require a paradigm shift in industry collaboration. Greater public-private partnerships, supported by models like the regulated asset base, can attract investment and share risks more effectively.
Supply chain resilience is critical amidst recent contractor failures. Integrated project management approaches that foster collaboration, share risks equitably and prioritise sustainable margins are vital.
By transitioning from transactional to cooperative frameworks, the industry can navigate the current challenges, ensuring the UK’s ambitious construction agenda becomes a reality.
