Slowdown starting to hit as cost pressures ratchet up

The brakes on growth are beginning to emerge, with the slowdown being blamed on a host of issues such as the war in Ukraine, labour and product availability and the impact of the reverse VAT charge.

In its latest quarterly forecast, the Construction Products Association (CPA) said growth would come in at 2.8% in the second quarter – down from the 4.3% growth forecast just three months ago.

The CPA said the industry was being hit by ongoing labour and products shortages as well as the costs of the reverse charge VAT and IR35.

It added: “Prior to the conflict in Ukraine, UK construction was already facing labour and product availability issues and the impact of. Rising energy costs were driving near-record price increases in construction products and the continued conflict is exacerbating this issue.”

The CPA said demand remains strong, with the current project pipeline suggesting this will continue throughout Q3 and into the autumn.

But it warned that contractors are beginning to feel the effects of cost pressures now, especially those working on fixed-price deals.

“For future projects, contractors will be forced to re-price, add fluctuation costs and introduce risk-sharing arrangements to deal with the uncertainty over potential cost inflation,” it said.

Noble Francis, CPA economics director, added: “The major challenge is creeping uncertainty. The immediate picture is one of resilient demand and healthy pipelines. Longer term, the current inflationary pressures, if sustained, will have an increasingly depressing impact.

“Specialist sub-contractors are feeling the effects first, particularly those working to fixed-price contracts. For future projects, contractors will be forced to re-price, add fluctuation clauses and introduce risk-sharing arrangement to deal with the uncertainty over potential cost inflation.”

In private housing repair, maintenance and improvement, the CPA said the sector was arguably most exposed to current price inflation, falls in consumer confidence and pressures on household incomes. Overall, output is expected to fall by 3% in 2022 and 4% next year from current all-time highs.

Private housing remains strong, with housebuilders reporting resilient demand with output forecast to rise by 1% in both 2022 and 2023. But this is down on the 3% per year growth forecast three months ago.

The fastest growth is expected in the industrial sector, in which output is forecast to rise by 9.8% in 2022 and 9.3% in 2023, due to a strong pipeline of warehouse projects, resulting from a long-term shift towards online shopping.

Infrastructure, which is traditionally less affected by immediate economic conditions, remains positive. Large projects such as HS2, Thames Tideway and Hinkley Point C combined with the five-year spending plans in regulated sectors such as rail, road and power generation point to a forecasted growth of 8.8% in 2022 and 4.6% in 2023.

On the supply side, it said the main immediate impact of the war in Ukraine for construction products will be the knock-on from rising energy prices and commodity shortages with aluminium, steel, bricks and cement all affected.