The outlook for construction investment remains challenging, with little or no growth coupled with persistently high inflation creating stagflation, the Building Cost Information Service (BCIS) cautioned in its latest industry report.
The report found that the dramatic increases in material costs are likely to slow as product supply continues to improve. This should help to offset the worst volatility in prices, which has been at its highest since the mid-1970s. However, most products that are energy intensive are still likely to see some price volatility.
BCIS warned that labour would likely become the main cost driver in the near term as ingrained worker shortages and high inflation push up nationally agreed wage awards to match site rates for self-employed labour.
The overall size of the construction workforce has shrunk by more than 150,000 since the pandemic, driven by a significant decline in the number of self-employed workers and there remains a shortfall of 46,000 workers in the construction industry.
Dr David Crosthwaite, BCIS Head of Consultancy, said: “The outlook for the construction industry at present is fairly bleak and challenging over the next five years.
“While the wider economy seems unlikely to fall into a deep recession, a sustained period of stagflation is the best we can hope for, which will make for a difficult environment for construction investment.
“New work output is still below the pre-crisis levels recorded in 2017 and forecasts suggest new work output won’t return to pre-crisis levels until 2027, representing ten years with no real growth in the sector and a lost decade.
“Output in the largest sub sector, housing, is expected to decline sharply this year, with infrastructure the only sector showing any sustained growth over the next five years, despite recent tinkering with HS2 and the Lower Thames Crossing project.
“This is based on our working assumption that the infrastructure and construction pipeline isn’t drastically cut back by the Government when this is reviewed in the autumn.”
BCIS said the Office for Budget Responsibility (OBR) was forecasting just one year of negative growth in 2023 but Crosthwaite feels that the recession may last longer as the fundamentals don’t support this upbeat prediction.
In the wider economy, prices tend to be sticky and the target of halving the Consumer Prices Index by the end of the year, and returning to long-term trend by 2024, looks optimistic based on the data.
Crosthwaite added: “Continuing interest rate rises are a blunt instrument and have the capacity to choke the economy.
“Inflation is largely being driven by too little supply and not much demand. Any impact on future demand levels with relatively high interest rates impacting the cost of borrowing, could reduce investment levels further and result in increased recessionary pressures and a stagnating economy.
“So, in the wider economy we have the prospects of relatively high inflation and the cost of borrowing increasing, combined with little or no growth.”
BCIS also found private commercial property had not recovered since the 2008 peak, having suffered the fallout from the financial crash and the recent changes to demand for both retail and office space, which has fundamentally changed following the pandemic.