Perspectives

Construction faces potential inflationary pressure as demand picks up

2 min read

In the latest Market View, for Q1 2021, Mace forecasts an improved outlook for the construction sector, although tender prices are still expected to fall.

According to the report, new orders in construction were 8.8% smaller in Q4 2020 than Q3 2020 and construction output ended the year 3.5% smaller than before the pandemic.

Having experienced a sharp fall in activity in 2020, construction output has now recovered across all sectors, with infrastructure dominating the outlook due to Government investment in large public sector projects to support economic recovery.

Even with the prospect of rising demand, the Market View highlights that construction businesses are still facing the effects of coronavirus, with many reporting a risk of insolvency due to sites shutting down earlier in 2020 and the impact that this had on programmes.

In the medium term, the Market View suggests that demand rising and a shrinking workforce - due to an ageing population, drop-off in the number of apprentices and smaller number of EU-born workers - might cause higher levels of inflation.

Other regulations that construction businesses must adapt to are the Government’s ‘Build Back Better’ plans, its new Construction Playbook and Green Paper on transforming public procurement.

Steven Mason, Managing Director for Cost Consultancy at Mace, said:

“As we approach the end of the first quarter of 2021, the combination of increasing input prices and improving market sentiment are having an upward impact on our market forecasts.

“While conditions remain challenging, the current ‘lull’ in pipeline is not expected to last and construction output will increase as the impact of government investment plans starts filtering through to the market.

"The repurposing and reconfiguration of commercial and retail space is also likely to see a significant shift in activity, and the question is how the industry will react to a potential surge in demand, as concerns linger about the longer lasting impact on input prices and labour availability in a post-Covid-and-Brexit UK market.”