Construction market has reached peak and energy costs mean ‘darker turn’, warns Arcadis

The post-covid recovery has reached its peak and market conditions are about to take a “much darker turn”, Arcadis has said in its latest quarterly update.

The consultant warned that inflationary pressures will continue throughout 2023 as a result of soaring energy prices.

The firm is predicting a prolonged but shallow slowdown for UK construction, with demand having so far proved resilient in the face of economic downgrades from the Bank of England.

While there have been some signs of emerging stability in the price of commodities, spiralling energy costs are likely to mean the high inflation of the first half of 2022 will remain baked-in, according to the consultant.

Total construction orders fell by 10.45% in Q2 on the previous three months, the largest quarterly fall since the final quarter of 2020.

Simon Rawlinson, head of strategic research and insight at Arcadis, said it was “clear that the current cycle has peaked” and that the market was slowing down.

“Just how severe the slowdown will be, and whether it will bring down costs, remains uncertain,” he said.

“There are certainly signs that commodity prices are falling, but rising energy costs are baked-in, and their full impact yet to be felt.”

The consultant confirmed its 2022 tender price forecast at 10% for buildings and 12% for infrastructure – the upper end of the previous forecast’s range.

Its forecast for 2023 remains at 2%-3% for the building sector, though infrastructure has been increased by one point to 5%, recognising its high background demand and greater exposure to materials cost.

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But there was so more optimistic news with Arcadis saying there was so far no sign of the collapse in demand which caused such damage to the industry after the 2008 financial crisis.

Ross Baylis, head of cost and commercial management, said: “When the global financial crash of 2008-2012 ushered in the last protracted downturn, significant damage was done to collaboration in the industry as investment dried up and clients turned to single-stage tenders to increase competition.

“This came at the cost of team focus and integrated working practices which left a lasting impact of sub-optimal outcomes.

“It’s hoped these lessons can be learned this time and demand can hold up well enough to maintain good working practices across all sectors.”