A second wave of Covid-19, combined with an imminent end to trading agreements with the European Union, is likely to further dent already low investor confidence and suppress demand for construction in the near future.
This is the analysis within Arcadis’ latest quarterly analysis of the UK construction market. It titles its autumn market view A Long Way Back.
Regulated industries are obliged to keep spending on infrastructure: AMP7 in the water sector, CP6 in rail and Highways England’s RIS2 regulatory investment periods are all getting going. These are setting infrastructure up for a growth rate of almost 30% in 2021, Arcadis predicts, but this will increase pressure for resources in the sector.
Meanwhile the buildings sector is proving far less resilient, with the industrial and commercial sub-sectors not expected to recover to 2019 levels until 2022, and public sector workload at risk because of the cancellation of the three-year comprehensive spending review.
As a result the economists at Arcadis have maintained their deflationary forecast of -3% for building tender prices regionally, with a -4% drop in London in 2020.
In 2021 it predicts building tender prices will shrink by a further -1% in the regions and by -2% in London before returning to growth in 2022.
Over the next five years the regional building tender price inflation will be 11% and 10% in London; however for infrastructure work it will be 20%, Arcadis predicts.
The company says that the timing depends on how quickly demand levels pick up and, with high levels of risk associated with Brexit and Covid-19, planning for recovery is particularly difficult. It will therefore be important for businesses to explore measures aimed at shoring-up overall business resilience, including how they engage with the supply chain, as well as reviewing risk transfer mechanisms and delivery strategies to understand and mitigate any impacts from unexpected delays or shortages.
Simon Rawlinson, head of strategic research at Arcadis, said: “Over the last six months, construction has been subject to multiple extremes, with a dip in output in April followed by a sharp increase in output of around 20% in June and July. Ongoing economic and political challenges will continue to have an impact, so it is no surprise that confidence levels across the sector hang in the balance.
“The differences we’re seeing in the pace of recovery between sectors underlines the scale of the challenge. Implications include an increase in competition for workload across the buildings sector, as well as a shift of resources towards infrastructure. To ensure an ongoing recovery, it’s therefore critical for businesses to have strong resiliency measures in place, not just when it comes to managing the second wave of Covid-19 and its consequences, but also taking into account the fact that Brexit will be happening simultaneously.”
Asked to expand on the implications of the forecast increase in infrastructure tender prices, an Arcadis spokesperson explained: "Average annual inflation on infrastructure projects since 2016 has been 3.6%, so the increase we are forecasting is not a significant step-up in the long-term trend. We have increased the forecast above 3.6% to reflect a tighter labour market from 2022-2023 onwards.
"The tender price index relates to new projects rather than existing projects that have been tendered, which are likely to have project specific agreements with respect to inflation.
"The short-term reduction in price inflation during 2020 and 2021 will actually contribute to a reduction in costs on some projects."