31 May 2023

Stace Outlook Index, Q2 2023

The Stace Outlook Index brings you the latest updates on the UK economy, the industry and Tender Price Index (TPI) forecasts.

Recession avoided but growth prospects falter.

While the prospect of a recession in early 2023 has faded in recent months, growth prospects remain sluggish with high levels of inflation looking much stickier than anticipated and increased borrowing costs weighing on expansion. GDP grew by 0.1% in Q1 2023 but fell by 0.3% in March driven by poor performance in the services sector.

April’s Bank of England (BoE) Decision Maker Panel predicted cooling wage growth and inflation in 2023. Inflation is, however, unlikely to fall as far or as fast as previously thought, due to the tight labour market and the pressure on pay awards impacting wage growth and persistent cost pressures. These factors, along with soaring food prices, also contributed to the decision by the BoE to increase interest rates by 0.25% to 4.5%.

The pressure on materials and supply chains caused by rapid workload expansion following the lifting of 2021’s lockdown has eased. However, they have been replaced by persistently high levels of inflation caused by rising wages.

Recent sentiment indicators point to a marginal, yet uneven, increase in construction activity. However, there are few signs that this growth is being sustained, primarily due to lingering client hesitancy caused by borrowing and construction costs, and low values. The Building Safety Act 2022 is affecting the viability of residential sector schemes and will delay progress to achieve planning. Customer confidence has undoubtedly improved (GfK), but that isn’t necessarily translating into increased values and new work. The commercial sector remains relatively resilient and there is a robust pipeline of infrastructure projects.

Evidence of a continued easing of material costs, albeit still at record high levels, and less price volatility, is bringing more certainty for contractors (ONS). Labour shortages and wage increases remain problematic and a source of continued cost inflation. Industry commentators are predicting an increase of 2.75% to 3.45% for 2023 and around 3.0% for 2024. Stace’s current analysis of the data has led us to set the Stace LLP TPI all-in average forecast for 2023 at 3.5% for the UK and 4.0%
for London.