The shadow of stagflation
Disruption caused by the Ukraine War, seen in both material prices and risk allowances has resulted in Arcadis upgrading its inflation forecast for 2022. Inflationary pressures on buildings are expected to peak at 8-10% in London and the regions, with increases of 10% in infrastructure.
Development headwinds associated with labour and product price and availability continue to challenge the industry, although there are some positive developments, including a 4% increase in the size of the workforce during 2021 and the easing of supply shortages associated with timber and some other construction products.
Summer Market View:
All of these developments have been overshadowed by the effects of the Ukraine crisis, even though materials sourced from Ukraine barely account for 1.2% of the value of construction’s imports. The impact of the war has added 3 to 5% to the cost of typical projects. Although a big jump in steel prices grabbed the headlines in March, the broader impact of the crisis will be felt through sky-high energy costs, which disproportionately affect the construction materials supply chain. Prices are expected to remain high until the UK and European energy markets are retooled to be less dependent on Russian gas and oil.
Higher prices and difficulties in reaching terms that are acceptable to clients, contractors and funders mean that an increasing number of projects are being delayed. In time this will result in lower levels of demand that, all things being equal will create a more competitive market.