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Arcadis warns on second wave of inflation

6 Dec 21 Construction consultant Arcadis says that high construction price inflation is set to continue into 2022 in the UK, fuelled by the energy crisis.

Arcadis has updated its tender price forecast, with inflationary pressures on buildings expected to peak at between 4% and 6% in London (4% to 5% regionally), and with increases of 5% and 6% in infrastructure.

The first wave of inflation to hit construction was driven by a shortage of materials; this wave is all about energy costs, Arcadis says

Arcadis’ latest quarterly market report says that the  inflationary pressures that began to accelerate around June show no signs of fading and there has been a rapid lift-off in costs during the second half of 2021. It expects this to continue into 2022.

Overall, the outlook for construction remains positive and business confidence is strong. New orders for the first three quarters of 2021 were well ahead of pre-Covid levels.

But rising energy costs are bringing a second wave of inflation across a much wider range of construction materials. Due to the high energy intensity involved in their manufacture, products such as bricks, glass, cement and concrete are particularly exposed. This is expected to have a much wider impact on prices than the raw materials boom, which mostly affected metals and timber.  Arcadis says that it is “uncertain how the situation will unfold”. Certain sectors such as private residential and industrial warehousing should continue to boom but more price sensitive markets, like affordable housing, could see a slowdown.

As a result, Arcadis has upgraded its overall 2021 forecast, driven by a combination of ongoing inflationary factors around construction materials and logistics, together with the emergence of new pressures around energy costs.

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Infrastructure is particularly exposed to the cost of materials, and so the forecast has been upgraded from 4% to 5-6% for 2021. But demand remains strong with multiple frameworks entering the procurement phase.

In 2022, the forecast upgrade is less pronounced, but inflation is still expected to be between 3% and 5%.

From 2023 onwards, the rate of growth in many sectors is expected to ease, with inflation falling back to 3% in London and regionally, and 5% for infrastructure.

Arcadis market intelligence lead Agnieszka Krzyzaniak said: “Continuing high output proves that the strength of the construction industry shows no signs of abating, and the recovery continues.  Strong new orders data indicates that the demand is still there and, as such, prices are not likely to decrease anytime soon. Although we can expect the upward pressure on costs to start easing in 2022, elevated inflation rates will still remain a defining feature of the market. The difference is that it will be mainly driven by rising energy costs and, with the energy used in manufacturing materials translating into around a quarter of total construction costs, the sector is particularly vulnerable to any prolonged price increases.”

She added: “As well as construction materials, another area exposed to energy price fluctuations – albeit to a lesser degree – are on-site operations. From next April, they will be impacted by the removal of the red diesel rebate. However, there are a number of short-term measure that clients can take now to reduce their exposure to risk. For example, cutting the idle and stand-by time of equipment will save on fuel, and has the added benefit of reducing carbon emission. In the longer term, switching to electric equipment, planning for the adoption of hydrogen and educating plant operatives in managing emissions will not only result in energy cost savings, but pave the way for more positive societal impacts too.”

Arcadis’ 2021 UK Autumn Market View is available to download here.

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