Construction sector ‘clinging on’ in latest Arcadis forecast

The UK’s construction market is ‘clinging on’ thanks to a better-than-expected start to the year in the wider economy, however demand is still expected to fall sharply, according to analysis from Arcadis in its Spring 2023 Market View report.  

After a bleak end to 2022, the start of 2023 has seen prospects for the UK economy markedly improve, with CPI inflation falling more sharply than expected and growing expectations that Bank of England base interest rates could be near their peak. 

However, even though 2022 proved to be a good year for construction, demand is still expected to fall sharply in 2023, with housing demand expected to be hardest hit. 

The quarterly analysis of the UK construction market from Arcadis looks across sectors and regions to deliver a tender price forecast to inform clients about what is going on in UK construction, helping financial decision-making for projects and programmes.

2022 turned out to be a year in which the construction sector defied the wider economic gravity to record a record-breaking year, with output in cash terms exceeding £200bn for the first time. Demand has held up remarkably well in the face of continued headwinds. 

However, Arcadis takes the view that the market fundamentals have not changed and current levels of demand cannot be sustained and while the outlook for the near-term future has improved, Bank of England forecasts for long-term sustainable growth have been downgraded, leaving many sectors exposed.

On the positive side, there are clear signs that inflationary pressures affecting construction are now subsiding, with material price inflation well below its peak of 30% reached in June 2022 and encouraging signs of a return to more normal trading conditions. External factors, such as the re-opening of the Chinese real estate market could add complicating factors however, and contractors and clients will need to be alert to this, according to Arcadis.

As a result, Arcadis has confirmed the 2023 forecast at 2% for regional building markets, but revised up from 2% to 3% in London, reflecting the continuing resilience of the London market. 

For infrastructure construction, the 2023 forecast has been retained at 6-7%, reflecting the continued diversion in inflationary pressures between building infrastructure construction, with infrastructure being affected by materially higher inflation than for buildings. 

For 2024 and 2025, infrastructure inflation has been retained at 3%. Falling conventional fuel costs will help to reduce input price pressure on many sites whilst lower levels of workload will also keep a cap on inflationary pressures.

Looking ahead to 2026 and 2027, Arcadis sets out a long-term inflation expectation at 5% across all sectors in recognition of likely long-term upward pressure on labour markets and earnings. 

Simon Rawlinson, head of strategic research & insight at Arcadis, said: “The UK’s construction market continued to be resilient throughout 2022. The sector broke all records to deliver sky-high output even as the Ukraine War, soaring interest rates and the UK’s political chaos undermined investor confidence. While a slowdown has long been expected, it is still yet to materialise and better than expected figures in the wider economy have helped to improve confidence over the first quarter of 2023. 

“However, the market fundamentals that point to a slowdown are still there and with long term growth in the economy forecast down, we are likely to see pressure increase, with poor investment prospects, a stubbornly tight labour market and stagnant GDP painting a challenging picture for the sector to operate in.”

With workload forecast to fall substantially in 2023 and growth in orders slowing, Arcadis predicts the regional distribution of existing and new work will take on increasing importance to future market conditions. Arcadis has analysed the performance of different UK regions, considering how well they have performed through 2021-22 in the face of economic headwinds and what this means for the outlook for 2023, comparing workload, pipeline and workforce.

From a workload perspective, London and the West Midlands feature strongly, thanks to the recent contribution to increased activity from HS2. For orders, the north-east and south-west have both done well, with industrial and infrastructure growth compensating for a lacklustre housing sector. For jobs, only regions in the north of England and Scotland have seen a material increase. London's workforce remains well below pre-Covid levels, although there were some encouraging signs of growth during 2022.

Combining all of Arcadis’ data, for 2023, the south-west looks as if it will be a busy market presenting challenges for project procurements this year. By contrast, the east Midlands, Wales, and Scotland, which all saw sub-par levels of activity in 2021 and 2022, are likely to see a window of opportunity opening sooner than other regions in the UK.   

Ross Baylis, head of cost and commercial management, said: “One of the key findings from our Spring Market View is that despite substantial headwinds, markets have remained strong throughout 2022. However, this strength is far from uniform and differs substantially by region and sector.” 

The full UK Spring Market View is available to download here.