02 December 2024

Stace Outlook Index, Q4 2024

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

Maintaining the momentum

The election of the new Labour government in July bought with it plans for “a decade of national renewal” that places construction at the heart of its agenda for the long-term investment in capital spending and infrastructure to underpin its industrial strategy and development priorities. Although, it’s fair to say that Labour are starting from a low base in terms of the UK’s fiscal position and forecasts.

A rise in construction output in Quarter 3 2024 was encouraging following three consecutive quarterly falls in output, and the sector appears to have been buoyed from having a prominent policy position in government plans for housebuilding, net zero retrofit, and clean energy infrastructure. However, little of that positive rhetoric sits behind recent growth as spending plans will take time to translate into activity. In the meantime the challenge will be maintaining momentum in the face of weaker business and consumer confidence. Perhaps less encouragingly, new orders in Quarter 3 sank to their lowest level since Quarter 4 2023, having grown steadily over the first half of 2024. There are also ongoing challenges, in the shape of skills shortages, a soft housing market, and building safety reforms.

The Building Safety Act remains a source of confusion and concern in the residential sector with large numbers of Gateway 2 applications awaiting approval, leading to project delays and costs, while uncertainty remains around when the Building Safety Levy is likely to be launched.

Materials costs have also ticked up recently due to supply-chain disruption. So, despite an uplift in activity over recent months optimism has subsided, according to evidence from the Purchasing Managers’ Index (PMI).

With many businesses still digesting the Budget, which increased the cost burden on businesses to partially fund government spending plans, confidence levels and activity may be further impacted. However, the outlook remains that the economy will continue to grow over the winter.

The current situation is likely to be aided by the recent interest rate cut. In August, the Bank of England initially reduced interest rates from 5.25% to 5%, the first cut in over four years, believing that inflationary pressures had eased sufficiently to justify a policy shift. A further drop in the headline inflation rate to 1.7% in September prompted an additional 0.25 percentage point cut in November. However, inflation jumped to 2.3% in October, driven by rising energy prices and a still robust labour market, surpassing the Bank’s 2% target.

Inflation is anticipated to rise in the coming months, stabilising above the target rate. However, geopolitical issues, such as the escalation of the Russia-Ukraine conflict and increasing tensions in the Middle East, pose risks to supply chains and oil prices, potentially driving inflation higher. Additionally, increased government spending could exert upward pressure on inflation in the near term. There are also risks of a trade war prompted by increased US import tariffs mooted by president-elect Donald Trump. All of this means, that further interest rate cuts are likely to be gradual and contingent on inflation remaining close to target.

Elevated funding costs have led to increased caution amongst clients with some adopting a wait-and-see approach to decision-making. These delays are not without consequences. The construction industry is currently experiencing a high number of insolvencies, the most notable of which being ISG in September, with business failures having increased 4% in the year to July 2024 compared to same period in 2023 and they are about 36% above their pre-pandemic level. The erosion of capacity within the sector is likely to have an adverse impact on growth.

Skills shortages also remain a challenge for the sector, affecting both site labour and professional services. Vacancies remain historically high and look to be on the increase. While there has been some marginal growth in workforce numbers in the most recent quarter employment levels remain down on 2023, particularly amongst the self-employed. It is likely that skilled labour shortages will hinder project delivery, and they continue to pose the main source of inflationary pressure as activity levels pick up.

Tender Price Inflation has generally been on a downward trajectory since 2023 and continued to ease in 2024. The BCIS All-In Tender Price Index (TPI) increased by an estimated average of 0.5% between Q2 2024 and Q3 2024, resulting in annual growth of 2.1%.

A combination of growing economic stability, increasing demand, and a generally favourable policy narrative has helped to boost order books in recent months, although client confidence remains fragile. As a result, industry commentators are predicting tender price inflation of 2.0% to 3.0% for 2024 and 2.5% to 4.0% in 2025. Stace’s current analysis of the data has been maintained, setting the Stace LLP TPI all-in average forecast for 2024 at 2.0% and 2.5% for 2025.