Things are looking up despite all the uncertainties ahead

Having managed our way over the past couple of years to this point, there are many who hope that 2022 will be the turning year where society and business are able to maintain momentum, with no significant disruption. With this hope, it is worth reminding ourselves of the financial state of play, and what the outlook is for the construction sector.

The economy staged a significant rebound at the end of 2021, but remains 1.5% smaller than it was in 2019. The average new forecast for GDP growth this year is 4.7%, but CPI is rising quickly, ahead of Bank of England expectations.

>> Also read: One thing is certain: uncertainty lies ahead

It started 2021 at less than 1% and finished above 5%. Some feel it may now peak above 7%, but the consensus is that CPI will fall back towards the Bank of England’s target of 2% over the next two years.

The Bank of England is worried about the impact of interest rate rises on households and businesses, so will try to limit base rate increases, despite the need to keep inflation in check. The UK’s debt position has been stable if still eye-wateringly large (currently at £2.3tn, or 104% of GDP) and the Office for Budget Responsibility is due to review and revise its forecasts next month.

Of course, there are remaining Brexit frustrations, but most of these seem to be being managed

Materials supply pressures have eased as many predicted, though there are some continued shortages, particularly in China, where ports are clogged and factories are subject to closures. Of course, there are remaining Brexit frustrations, but most of these seem to be being managed.

Unemployment is below the long-run average and the number of job vacancies has increased, reducing the number of candidates per vacancy and putting pressure on wages. It is a fair assumption that labour pressures will overtake materials concerns this year.

In terms of the construction market, new work output is still lower than pre-covid, with private commercial work the most affected, but infrastructure benefiting from government focus. Residential output is still 7.5% lower than pre-covid, but has experienced a fairly stable recovery.

Labour is an increasing concern given the huge loss of construction workers caused by covid restrictions and Brexit. This pressure is currently being alleviated through lower construction output but, as the pipeline returns, pressure on wages may increase. Conversations with some contractors suggest that labour is beginning to return from Europe, however, so this remains a topic to be watched.

There is no doubt that things are delicately poised and that a cocktail of price drivers still exists 

There is still appetite in the market for work and this is helping to mitigate a lot of the cost pressures on materials and labour, but there is a serious question over how sustainable this is as contractors face covid support repayments and the shadow of any losses incurred throughout the pandemic.

There is no doubt that things are delicately poised and that a cocktail of price drivers still exists: Brexit paperwork, covid impacts, supply and demand, sustainability. Some of this uncertainty and complexity is likely to continue for a while longer, but will hopefully ease at some point.

Supply and demand is a key driver for UK construction prices. There remains a window of opportunity as the London/South-East market is yet to pivot, reducing buying power. At the moment, some main contractors have teams becoming available from some large projects, and are looking to secure from a target list of attractive schemes.

There is also an element of hunger among the key trades. However, this will change as the pipeline strengthens, which will also put pressure on the labour pool.

Having said all of this, construction pricing will be dependent upon some key issues in 2022 and beyond, namely:

• The extent to which the pandemic becomes endemic, with manageability of covid continuing and improving.
• A more settled pattern of working, and thus a clearer view of organisations’ real estate needs.
• The effectiveness of the industry in addressing corporate ESG ambitions, creating sustainable buildings cost-effectively. There is also a long way to go in achieving consistencies in definitions and measurement, and managing the whole process (carbon accounting).
• Reponses to updated Building Regulations and product testing requirements.
• Smoothing of the town planning process. For example, easing of the current particular issues in City of London approvals.

I am sure that this will be an interesting year. Let us hope that it will be a good one too.

Iain Parker is a founding partner at cost consultant Alinea