Demand uncertainty could mean a two-speed construction sector

Construction is likely to temporarily become a ‘two-speed’ industry, characterised by high growth rates in infrastructure set against ‘slow-growers’ in the industrial and commercial sector, Arcadis has warned. They say that a second wave of Covid-19, combined with a looming final Brexit date of 31 December, will further dent already low investor confidence and that this is likely to suppress the demand for construction in the near future. 

The analysis is highlighted in Arcadis’ latest Autumn Market View, entitled A Long Way Back. 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.

A number of cyclical investment programmes are now coming to fruition, such as AMP7 in the water sector, CP6 in rail and RIS2 for highways. These are setting infrastructure up for a growth rate of almost 30% in 2021, but this will increase pressure for resources in the sector. Meanwhile the buildings sector is proving far less resilient, with the industrial and commercial sub-sectors not expected to recover to 2019 levels until 2022, and public sector workload at risk thanks to the cancellation of the three-year comprehensive spending review.   

As a result, Arcadis has maintained its deflationary forecast of -3% for building tender prices regionally, with a 4% drop in London in 2020. The forecast was adjusted for London in 2021 to -2%, illustrating the slower return of demand. A better than expected growth in infrastructure resulted in an upgrade to 2-3% growth per annum in 2021 and 2022 respectively. 

In the long term, Arcadis predicts the return of above-trend inflation for all sectors from 2023 onwards, mainly driven by constraints in the labour market. However, the timing depends on how quickly demand levels pick up and, with high levels of risk associated with Brexit and Covid, planning for recovery is particularly difficult. It will therefore be important for businesses to explore measures aimed at shoring-up overall business resilience, including how they engage with the supply chain, as well as reviewing risk transfer mechanisms and delivery strategies to understand and mitigate any impacts from unexpected delays or shortages. 

Simon Rawlinson, Head of Strategic Research at Arcadis, said: “Over the last six months, construction has been subject to multiple extremes, with a dip in output in April followed by a sharp increase in output of around 20% in June and July. Ongoing economic and political challenges will continue to have an impact, so it is no surprise that confidence levels across the sector hang in the balance. 

“The differences we’re seeing in the pace of recovery between sectors underlines the scale of the challenge. Implications include an increase in competition for workload across the buildings sector, as well as a shift of resources towards infrastructure. To ensure an ongoing recovery, it’s therefore critical for businesses to have strong resiliency measures in place, not just when it comes to managing the second wave of COVID-19 and its consequences, but also taking into account the fact that Brexit will be happening simultaneously.”

Click here to download the full Autumn 2020 Market View, including a five-point Brexit preparation plan updated to incorporate managing Covid risk.