UK market view: Q3 2022

21 September 2022

Responding to the energy crisis

Key takeaways

Mace maintains its 2022 tender price forecast at 8% despite the ongoing energy crisis

The 2023 tender price forecast is reduced slightly to 3.5% from the previous 4.5%1

Rising energy prices and cost-of-living pose significant challenges for the construction industry

UK market view: Q3 2022

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For the first time in a while, we have decided there is no need to revise up our tender price forecasts for the year. However, with prices still set to rise 8% this year, and CPI already hitting double-digits, the turbulence facing the industry is not getting any better.

In addition, while we expect a further large increase in tender prices next year, the gathering headwinds and potential for a recession mean that we feel the need to bring these down slightly, to 3.5%. Usually, as the economy slows, one would expect tender prices to ease as competition between contractors grows and margins are slashed. However, there is only so much that prices can be cut in the face of rising input costs.

While some commodity prices have fallen over the summer, higher energy costs and gradually accelerating labour cost increases mean, short of a recession or an end to the Ukraine war leading to a large reversion in these factors, prices will continue to increase.

Instead, we do anticipate inflation to cool-off in 2024 and 2025, but if the economy slows faster and further than expected, then we may need to bring forward and revise down these figures. More worryingly, if inflation becomes embedded, as the Bank of England fears, then later years could also see high levels of inflation. The decision to raise interest rates by 50 basis points at the start of August, and that additional rate rises are highly likely, is in large part down to trying to avoid such a situation.

A recession is usually defined as two consecutive quarters of negative growth and the slight fall in GDP in Q2 means that if there is another decline in the third quarter, then technically the UK will be in one. Yet with construction output growing robustly in Q2 it is clearly feasible that the sector would continue to grow in Q3 even if the economy contracted again. In such a situation, one would be hard pressed to say the worsening state of the economy was materially impacting construction.

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