In its latest quarterly report, the Construction Products Association (CPA) predicts a dramatic slowing in growth as global issues, including wear in Europe, start to affect the UK market.
In any other year, 2.8% growth in construction output would be considered cause for celebration, the CPA said, but not when you had been expecting 4.3% growth just three months ago.
The CPA says that overall demand remains strong across the construction industry in the second quarter of 2022 and the current project pipeline suggests that this will support activity levels into the third quarter at least. The downward revision to the growth forecast stems from concern around price pressures arising from both local and global issues.
Prior to the conflict in Ukraine, UK construction was already facing labour and product availability issues and the impact of reverse charge VAT and IR35. Rising energy costs were driving near-record price increases in construction products and the continued conflict is exacerbating this issue. The impact of these pressures, and of more general rising costs, on demand will vary considerably by sector, it said.
The general picture is one of positive market conditions in the short term with anticipation of tougher times ahead.
The private housing repair, maintenance and improvement (RMI) market boomed after the pandemic took hold and the nation spent more time at home. SMEs report that demand remains high but this is now the sector arguably most exposed to price inflation, falls in consumer confidence and pressures on household incomes. Overall, output is expected to fall by 3% in 2022 and 4% next year from current all-time highs.
Private housing, the largest construction sector, remains strong, with house-builders reporting resilient demand. With longer-term questions over consumer confidence, output in this sector is forecast to rise by just 1% in both 2022 and 2023. This contrasts with the 3% per year growth forecast three months ago.
The fastest growth is expected in the industrial sector – rising by 9.8% in 2022 and 9.3% in 2023, due to a strong pipeline of warehouse projects, resulting from a long-term shift towards online shopping.
Infrastructure, traditionally less affected by immediate economic conditions, remains positive. Large projects such as HS2, Thames Tideway and Hinkley Point C combined with the five-year spending plans in regulated sectors such as rail, road and power generation point to a forecasted growth of 8.8% in 2022 and 4.6% in 2023, the CPA reckons.
On the supply side, the main immediate impact of the war in Ukraine for construction products will be the knock-on from rising energy prices and commodity shortages. Soaring energy costs will have to be passed on and lead to sharp rises in the cost of energy-intensive products. This will affect both imported products such as aluminium and steel and locally sourced products such as bricks and cement.
Contractors are likely to feel the pressure first, particularly those working to fixed-price contracts. For future projects, contractors will be forced to re-price, add fluctuation costs and introduce risk-sharing arrangements to deal with the uncertainty over potential cost inflation.
CPA economics director Noble Francis summarised: “The major challenge is creeping uncertainty. The immediate picture is one of resilient demand and healthy pipelines. Longer term, the current inflationary pressures, if sustained, will have an increasingly depressing impact, while the continuation, or potential escalation, of conflict in Europe presents an existential risk.
“Specialist subcontractors are feeling the effects first, particularly those working to fixed-price contracts. For future projects, contractors will be forced to re-price, add fluctuation clauses and introduce risk-sharing arrangement to deal with the uncertainty over potential cost inflation.”