05 December 2023

Stace Outlook Index, Q4 2023

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

Economic resilience tested as growth flatlines

The UK economy has shown an unexpected level of resilience this year, defying forecasts of the longest recession in 100 years and weathering the highest level of inflation in over 40 years. High interest rates designed to combat inflation finally appear to be having a dampening effect on economic activity; impacting business investment and consumer willingness to spend and hitting growth.

The economy has undoubtedly lost momentum, with 2023 gross domestic product (GDP) falling quarter-on-quarter. The latest GDP data shows the economy experienced no growth in Q3. The continued fall in inflation will be welcomed by both businesses and consumers as well as government, and the Bank of England (BoE), but the effect of 14 consecutive rate rises will take time to work through into the economy. As monetary policy operates with a lag, the full effect of the recent rate hiking cycle will persist. Cost-of-living pressures and high interest rates are expected to persist into next year and inflation is not expected to reach the Bank of England’s target of 2.0% until at least 2025. All of which will continue to weigh on growth.

The performance of the construction industry has reflected that of the wider economy. Output has declined quarter-on-quarter with new housebuilding being hit particularly hard by increased borrowing costs. On a brighter note, new orders increased 3.9% in the last quarter, following three consecutive quarterly falls. It is however difficult to see how this will be maintained under tight government fiscal conditions. ONS data showed capital spending fell 2% in Q3, driven by a 4.2% contraction in business investment. Housebuilding, which is already at its lowest level since the 2020 COVID-19 lockdown, is expected to fall next year to its lowest since the 2008 financial crisis (HBF).

Materials supply has continued to normalise, although some materials, notably concrete products are still increasing in price. However, shortages in skilled labour have largely replaced materials costs as the main driver of project inflation. This is likely to continue in the short-term following the decline in the UK workforce post Brexit and the pandemic.

Tender price inflation has remained steady nationally at around 3.0% to 4.0% during 2023, although falling demand is likely to see rates ease off to between 2.25% and 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 2024 at 2.5% for the UK and for London.