Industry

07 MAR 2022

INDUSTRY FACES NEW NORMAL OF PERMANENTLY TIGHTER LABOUR MARKET, SAYS ARCADIS

Sustained construction demand means that Arcadis has upgraded its inflation forecast for 2022, with inflationary pressures on buildings expected to peak at 5% in London (5% regionally), and with increases of 6% in infrastructure. Material price inflation should be less of a problem in 2022 but Arcadis anticipates that labour cost pressure will emerge in its place.

The analysis comes courtesy of Arcadis’ latest Spring 2022 Market View: Another new normal. The quarterly analysis of the UK construction market looks across sectors and regions to deliver a tender price forecast to inform clients about what is going on in UK construction, helping financial decision making for projects and programmes.

The report finds that construction has returned to normal levels of activity with both orders and output reaching pre-Covid levels in late 2021. Inflationary pressures and other sources of supply chain disruption ramped up during H22021 led by spiralling energy prices. Material price inflation and energy costs continue to be a challenge. In addition, an emerging issue that will be increasingly difficult to manage is the labour market following the loss of over 200,000 operatives in two years, including a significant proportion of migrant operatives. A tighter supply of skills at all levels in the industry means that short and mid-term inflationary pressures will continue to grow. 

Encouragingly, labour performance seems to continue improving, as evidenced by construction productivity data, which is up by 12% in real terms compared to pre-Covid levels. Enhanced productivity will be a critical safety value in the absence of ready access to migrant labour sources.

The current semiconductors shortage is yet another consequence of Covid-19 disruption and is impacting the construction sector. A rapid increase in demand means that chips’ supply fell dramatically. Inventories fell to five days’ supply, as opposed to a standard 40 days pre-Covid. The shortage of a vital component limits output and increases the risk of delays in production for multiple manufacturers, many of them part of construction supply chain.

As a result:

  • Arcadis has upgraded its overall 2022 forecast, driven by a combination of energy costs driving material price inflation, an increase in national insurance rates and uncertainty about the construction materials availability;
  • High levels of inflation are coinciding with a tight labour market. Vacancy numbers are 50% higher than long-term average. Unemployment fell faster than expected and is forecast to fall to 3.8% in Q1 2022;
  • Unions representing 500,000 operatives have put in a claim for a 10% pay rise for 2022;
  • Infrastructure is particularly exposed to the cost of materials, and so the forecast has been upgraded from 4-5% to 6% in 2022;
  • Looking beyond 2022, there is little prospect of the labour market improving and as a result, Arcadis has upgraded its forecast for 2023.

Agnieszka Krzyzaniak, global research manager at Arcadis, said: “Make no mistake, the current semiconductors shortage is already showing signs of impact on the construction sector. Chips are present in virtually every electronic component we use and essential part of building controls and safety systems. There is little prospect of supply chains stabilising in the immediate future, and now is the time for clients to encourage close and early engagement of their sub-contractors with the manufacturing and distribution supply chains. Secure your spot in the waiting line as quickly as possible. Just around the corner, there are thousands of wind turbines and solar panels needed for energy transition, waiting to get their share of the chips supply.”

Simon Rawlinson, head of strategic research at Arcadis, added: “The UK’s recovering economy is not short of challenges. Mounting inflationary pressures and the unpredictable consequences of war in Ukraine demand an immediate response. Construction’s skill shortage is a long-term problem, and with new sources of demand such as energy transition, there is no obvious source of additional labour. Crucially, while construction works hard at making its opportunities as attractive as possible, the industry must also make sure it makes best use of the skills that it already has.”

Click here to download the full Arcadis Spring Market View: Another new normal.

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