UK market intelligence: getting ahead of a recovery curve
Our UK market intelligence report for spring Q1 2024 highlights continued headwinds for construction, with the UK in a technical recession and facing the prospect of political uncertainty as the country prepares for a general election later this year. However, uncertainty seems modest compared to levels in recent years and following pockets of encouraging investment for certain sectors announced in the Spring Budget.
With the UK in recession, a challenging economic backdrop and an unclear political course in the lead up to the next general election, assessing risk management in the supply chain is now more important than ever.
This means identifying contractor risk early, ensuring they are viable and reliable partners, and running a robust tender process to attract the best bidders. This will create a better balance of risk between client and the contractor. The industry also needs to focus on its use of data and digital tools, as well as attracting those with the required skillset to successfully implement them.
Economic overview
The latest economic data from the Office of National Statistics showed that the economy ended 2023 on a weak note. Gross Domestic Product (GDP) grew by just 0.1 percent compared to 2022. Excluding the pandemic-induced recession of 2020, this was the slowest increase since 2009.
The quarterly data was more noteworthy with the contraction of 0.3 percent in Q4 2023 GDP, following the 0.1 percent fall in Q3 2023 meeting the definition of a ‘technical recession’ – two consecutive quarters of negative GDP growth.
Despite the surge in interest rates and inflation, the UK economy has so far remained resilient. High unemployment and a severe housing downturn has been avoided, making this less of a typical recession.
The consensus is for a mild and short-lived downturn, with the economy expected to grow by 0.4 percent in 2024 and 1.4 percent in 2025.
Inflation is expected to continue its descent and hit the Bank of England’s two percent target in early spring this year. This was bolstered by Ofgem’s recent announcement of a significant cut in the energy price cap for the second quarter of 2024.
Despite the weakness in GDP data, wage growth remains strong and while the number of job vacancies fell for the 20th consecutive month, they are still above their pre-pandemic levels.
Construction overview
On a quarter on quarter basis construction output fell 1.3 percent in Q4 2023, following the 0.1 percent rise in Q3, the largest quarterly decline since Q3 2021. The fall reflects a decline in new works output of five percent in the same period, partially offset by repairs and maintenance growing by four percent.
Within new works, private housing declined for the eighth consecutive quarter, falling eight percent on the quarter in 2023 Q4, followed by infrastructure new works, by 7.5 percent, and private commercial by 2.3 percent.
New orders also fell by 13.1 percent (£9bn in value) in Q4 2023 compared to Q3 - the lowest level since Q2 2020, when COVID-19 lockdown restrictions were in place. Private housebuilding continues to remain in a state of weakness, having declined on a quarter on quarter basis since Q2 2021.
Nuclear power, both traditional and small modular reactors, also received welcome attention in the March Budget, bringing confidence that support for the sector will remain strong – including the purchase from Hitachi of its two Welsh reactor sites, off the back of the recently announced civil nuclear roadmap.
Tender price inflation forecast
Although sector demand continued to fall in the second half of 2023 and the economy is technically in a recession, we have marginally revised up our 2024 real estate tender price inflation forecast to 3.2 percent - previously 2.7 percent in our Q4 2023 forecasts. That said, figures are still down from the 9.5 percent in 2022 and 3.7 percent in 2023.
For the remainder of the forecast horizon, our projections remain closer to the long-run average. The spring 2024 infrastructure forecast remains consistent with our previous forecast update, at 4.5 percent in 2024 down from 5.5 percent in 2023. Notably, infrastructure work is less affected by the business cycle, and exhibits greater stability in the short term with several projects potentially in the pipeline.
One of the largest proposals is the Asset Management Period 8 (AMP8) in 2025 affecting all English and Welsh water companies. This would see a £96bn investment , an 88 percent increase from AMP7, to fund new reservoirs, upgrade pipes and clean waterways.
Network Rail is also set to allocate a large pot to renewing core assets like track, structures and earthworks to keep trains moving during adverse weather conditions, with a planned spending of around £40.8bn during the Control Period 7.
The Government has also given a welcome green light to the next section of East West Rail, accelerating works from Oxford to Bedford.
Securing the supply chain
After a decade of successive, major shocks, UK businesses and the construction industry seems unfazed by the unknowns that will come with a new government.
While the economy remains fragile, the technical recession seen in the second half of 2023 could prove both shallow and short. With interest rates set to fall and our real estate tender price inflation forecast for 2024 standing at barely a third of the level seen in 2022, built asset investment decisions are once again being made rather than delayed.
This is a good time to go to market, provided decision-makers map and manage the impact a change of the UK’s political direction might have on both their organisation and their supply chain.
Clients and their programme teams should use this opportunity to understand and underpin their supply chain, to manage the risks. This means identifying contractor risk early, conducting a robust procurement process and collaboratively sharing risk, incentive and ultimately value between the client and the contractor.
