Construction industry showing ‘first signs of slowdown’

The construction industry has “peaked” and is showing the “first signs of slowdown” despite recovering well from disruption caused by Covid-19, finance experts have warned.

In its latest market analysis, leading cost consultant Arcadis said the sector, which achieved historic high output figures in May, had enjoyed a “strong rebound” following the pandemic.

But it warned that “signs of strain” were beginning to show, caused in large by rising inflation – which it said showed no sign of easing – and by increasing material prices.

Analysts said price stability was also threatened by “spiralling energy costs”, which are likely “to impact the costs of basic material production and their availability”. This was despite recent government action to cap businesses’ gas and electricity bills for six months.

According to Arcadis, high inflation seen during the first half of the year is “likely to remain baked-in”, while the cost of living crisis will “sustain upward pressure” on labour costs. It predicted this would, in turn, lead to increased pay demands in 2023 and beyond.

The group’s Autumn 2022 Market View report highlighted a fall in total construction orders as a telltale sign of a slowdown, quoting a 10.5 per cent drop in Q2, the largest quarterly slump since Q4 of 2020.

Arcadis head of strategic research and insight Simon Rawlinson said: “While confidence in the construction market has remained more robust than the consumer market, it’s clear that the current cycle has peaked and we’re entering a period of slowdown. However, just how severe the slowdown will be, and whether it will bring down costs, remains uncertain.

“There are certainly signs that commodity prices are falling, but rising energy costs are baked-in, and their full impact is yet to be felt. We expect inflation to continue to be felt throughout the next 12 months and the effects of increased competition to eventually see inflation slow in 2024-25.’

In its review, Arcadis downgraded its overall outlook for buildings and infrastructure inflation from 2024 onwards, noting that, although deflationary pressures have increased, risk associated with energy market disruption “is likely to counteract this”.

For the building sector, the forecast for 2023 is unchanged at 2-3 per cent in regard to construction, according to the Construction Tender Price (CTP) index. However, infrastructure has been increased from 4 per cent to 5 per cent, in recognition of high background demand and potentially greater exposure to material cost inflation.

But there was some optimism as the cost consultant highlighted that the industry’s slowdown was starting from a “highpoint”, which could help to cushion any future crash in the market. It added that there was no sign of demand collapsing.

The report said: “Competitive pressure will take the edge off future price rises and this will be a shallow but prolonged dip rather than a blow-out. But with a high degree of uncertainty around energy costs and availability, there is still a risk the crisis could escalate further, and the slowdown could develop into a hard landing.”

In August, a report by US investment bank Citigroup predicted that inflation in the UK could exceed 18 per cent next year, the highest rate among larger western economies.

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