UK market intelligence: preparing to pivot
Our UK market intelligence report for winter Q3 2023 shows economic growth is continuing to make slow progress. Ongoing economic headwinds remain to impact the construction industry and price volatility among materials, plant and equipment weigh heavily on the sector. This is further affected by capacity and workforce shortages.
The scaling back of the northern leg of HS2, on which many other capital projects also hinged, has, however, forced parts of the supply chain to reset. The UK’s weak economic backdrop and this rebalancing of supply chain capacity has prompted many businesses to reassess the way they procure and to take a closer look at capital expenditure.
Economic overview: slow progress
Following the 0.2 percent rise in Gross Domestic Product (GDP) in Q2 2023 the economy stagnated in Q3 showing no growth on the quarter. That said the performance was better than the consensus forecast of a 0.1 percent fall.
In Q3, services output declined by 0.1 percent compared to the preceding quarter, production output flattened, and construction output saw a modest 0.1 percent rise. However, high inflation and interest rates continue to weaken business investment and household spending, both contracted in Q3.
Although the unemployment rate rose to 4.3 percent in the three months to August, up from 3.8 percent in the prior three-month period, the decline in those employed was a modest 207,000 in the same period.
For the moment the Bank Rate was unchanged in November 2023 at 5.25 percent for the second month running which is predicted to have peaked. Following weak GDP data and the sharp fall in inflation, financial markets now expect a rate cut next May.
However, before any rate cut the Bank of England will want to see a sharp slowdown in services inflation and CPI getting closer to the 2 percent target earlier than it expects (Q4 2025). The consensus forecast is for inflation to end 2024 at 3 percent and 1.9 percent in 2025.
Construction overview
Construction output slowly increased by 0.1 percent in the third quarter of 2023 and by 2.5 percent on the year. This slowdown is primarily attributed to contractions in house building, in both public and private initiatives, along with lower demand in the industrial sector.
New orders, however, have grown by 3.9 percent in Q3 2023 over Q2 after three consecutive quarters of contractions. This change was driven by increases in most sectors, with other non-housing public new work and infrastructure leading the way, recording increases of 23.7 and 14.2 percent, respectively.
Housebuilders continue to scale back their building plans due to the weakening of activity and higher borrowing and purchase costs. Private developers, however, are making more use of discounts and other incentives to support house sales – a trend also seen in previous housing downturns.
Many commercial real estate projects, such as warehouses and data centres have continued, although work on a growing number of projects has slowed, and new projects have been postponed.
Refurbishment and retrofitting continue to remain strong, particularly in the London office market, to improve energy efficiency and attract staff back to office working.
Tender price inflation forecast
The deflationary forces from falling demand are being counterbalanced by high interest rates, elevated material prices and shortages of skilled labour. As such, our tender price inflation forecast remains unchanged from the autumn revision at 3.7 percent for the real estate sector and 5.5 percent for infrastructure.
For the remainder of the forecast horizon, our projections remain closer to the long-run average.
The infrastructure sector grapples with a polarised market where certain segments experience notable surges in workload. Sectors like aviation, water, environment and power exhibit substantial upswings.
For instance, water infrastructure is expected to see a near doubling of capital expenditure during the upcoming asset management plan period (AMP8), surpassing historical spending levels. Meanwhile, in the aviation sector, the increasing passenger volume is boosting the works for expansion and modernisation to comply with evolving regulatory standards.
Time to recalibrate
As the headlines recede, the suspension of HS2’s northern leg could provide opportunity for those investing in built assets, if they are smart about the way they make full use of the redirected capacity and the robust investment in infrastructure.
Nevertheless, the UK’s weak economic backdrop means that businesses seeking to benefit from the industry’s rapid recalibration must be agile – and for many, this may mean updating the way they procure and finance capital expenditure.
Businesses must consider their design strategies and where, against current economic uncertainty, a more traditional model of built asset investment may allow them greater control and time to monitor markets and costs.
Companies should also reassess how they work with their supply chain to deliver on investment. Shifting from an alliance model to an enterprise model in their contractor relationships, as already seen in the water sector, can help firms to deliver against clients’ objectives.
