The construction industry is beginning to chart its way towards recovery, even as construction faces renewed challenges with the pandemic hitting its peak - according to Arcadis’s latest market forecast.
Although the pandemic remains at its height and the short-term outlook is still largely negative, ongoing construction growth backed by the public sector has led Arcadis to upgrade its inflation forecast and express greater confidence in the longer-term outlook – claiming the longer-term outlook is set to improve as the market rebalances from 2022 onwards.
The analysis comes courtesy of Arcadis’ latest Winter 2021 Market View - The end of the beginning. 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.
Although GDP fell by 2.6% in November, construction has continued its recovery, with levels of activity in November 2020 at last returning to pre-pandemic levels. With the roll-out of a vaccination programme and a final Brexit deal giving some measure of clarity, Arcadis claim there is increasing evidence that conditions are improving, and inflationary growth is returning as the pressure to secure short-term work looks set to gradually ease.
However, the report says that one of the unexpected side-effects of the pandemic has been the shortage of materials and components, thanks mostly to disruption in global supply chains. This, say Arcadis, is likely to filter into project costs and may potentially result in the need to reschedule works during the first half of 2021.
While new orders data for Q3 2020 showed a return to pre-pandemic levels, there remains a shortfall from earlier in the year. Based on 12 months of orders recorded to Q3 2020, the industry faces a potential £4.5bn gap. This means that markets will remain competitive in the short term.
As a result:
- Arcadis has adjusted its short-term forecast, with tender prices expected to increase marginally to 1% regionally, and remain flat in London;
- Infrastructure price growth is held at 2% for the year, but has been upgraded to 4% in 2022, driven by record government investment;
- Longer term, Arcadis maintains its inflationary outlook across all sectors, as stronger demand will be matched with the usual capacity constraints, especially around labour availability.
Agnieszka Krzyzaniak, market intelligence lead at Arcadis, said: “Multiple lockdowns have made for a bumpy road to recovery, and we are not out of the woods yet. But while we can’t afford to be complacent, it has been encouraging that even in the face of such difficult conditions, the construction industry has continued to deliver. Our inflationary forecast is backed by growth and, despite the temporary disruption in materials supply, we can expect a gradual return to normality as the market rebalances itself from 2022 onwards.”
Arcadis says that much of this returning confidence has been driven by the UK government’s long-term commitment to investing in the sector. Ambitious multi-year spending allocations for infrastructure, schools and hospitals, and continued investment in the housing sector, announced in last year’s Spending Review, have, say the company, given greater certainty to the supply chain. However, this injection of confidence comes at a price, and the industry will need to focus on transformation if the recovery is to be a success.
Mark Langdale, UK government sector director at Arcadis, said: “Government investment commitments are aimed at well-established, long-term programmes. However, turning the pipeline into on-site projects will be pivotal in supporting construction sector recovery and wider economic growth throughout 2021-22. The government will want to see evidence that the industry is equipped to deliver.
“Investment in innovation and transformation will be key, and the publication of the government’s Construction Playbook has been integral to articulating this vision. By addressing many of the long-standing pain points of the construction sector – from low productivity and the slow uptake of innovation to inefficient delivery and misplaced risks – the Construction Playbook can reset the relationship between government and industry. We need to act on its recommendations and support the transformation of construction into a more profitable, sustainable, and resilient industry.”