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Construction at risk of becoming ‘two-speed’ sector in face of uncertain demand

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. A second wave of COVID-19, combined with a looming final Brexit date of 31st December, will further dent already low investor confidence. This is likely to suppress demand for construction in the near future.

Construction has been subject to multiple extremes - businesses need strong resiliency measures in place to ensure recovery

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. This is unlikely to be sustained into Q4.

Arcadis Tender Price Forecast

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.
  • Better than expected growth in infrastructure resulted in an upgrade to 2-3% growth per annum in 2021 and 2022 respectively.

What should construction do to ensure resilience? 

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-19, 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.

We published the first version of our 5-point Brexit preparation plan almost two years ago and the recommendations are still valid. However, what we did not predict is that the ultimate ‘exit’ will be taking place in the middle of a global pandemic and during the biggest economic crisis in post-war history. In response, we decided to review the original 5-point plan, and have created an updated version that takes into account recent developments.

To find out more and see the updated 5-point plan in full, download the latest Autumn 2020 Market View here.  

 

Questions about this article

Simon Rawlinson

Partner - Head of Strategic Research and Insight +44 (0)20 7812 2319 Ask me a question

Agnieszka Krzyzaniak

Market Intelligence Lead, Construction Ask me a question

Andrew Beard

Global Head of Cost and Commercial Management Ask me a question

Arcadis White paper

UK Market View Autumn 2020

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