ECONOMIC OVERVIEW

Rife with unpredictability

If there is one truism, it is that businesses loathe uncertainty. Yet the UK’s current economic environment is rife with unpredictability. Since the start of Q2 we have seen employers’ National Insurance contributions (NIC) increase, the imposition of global tariffs by President Trump and a marked escalation in the Middle East conflict.

Together these factors pose a risk to investment, employment prospects and business sentiment, which is translating into lower growth prospects.

For the UK construction industry, the first half of 2025 was also a waiting game, with government announcements of 10-year industrial and infrastructure strategies finally coming in June. While these strategies should boost construction activity over time, the benefits will not be immediate.

Economic activity slowing

UK Gross Domestic Product (GDP) expanded by 0.7 percent in the first quarter of 2025, up from 0.1 per cent in the previous quarter and a little better than economists had predicted. On the face of it, the data points to a strong start to the year, however the latest monthly GDP data shows the UK economy started Q2 on a weak note, with output contracting by 0.1 percent in May, following the 0.3 percent fall in April.

Although monthly GDP figures can be volatile, most economists expect a weak outlook. Elevated uncertainty caused by increased geopolitical tensions in the Middle East and continued conjecture around tariffs are undermining business confidence and investment decisions. GDP forecasts have been downgraded for 2025 on the back of lower global trade and the possibility of renewed supply chain disruptions.

Source: Office for National Statistics

Path to lower interest rates

The annual consumer price inflation edged up to 3.6 percent in June from 3.4 percent in May, the Bank of England (BoE) expects the rate to remain above 3 percent at the end of 2025, before approaching its 2 percent target in 2026.

Given the softer economic outlook and the gradual easing of inflation, financial markets are still anticipating two further Bank Rate cuts during the second half of 2025, down to 3.75 percent, and a further cut taking Base Rate to 3.50 percent in 2026.

The stimulatory impacts of these cuts, which will make development finance cheaper, are expected to transmit to construction in 2026/27.

Interest rates directly impact the cost of financing construction projects. Higher interest rates create higher borrowing costs, affecting project feasibility and profitability. As we have seen recently, rising interest rates can throttle back investment in new projects, especially in the residential and commercial sectors.

Labour market loosening

The latest UK labour market data provided broad confirmation that conditions were loosening. The unemployment rate edged up and the number of vacancies continued to fall, with regular pay growth moderating again. Slower wage growth may ease inflationary pressure further and open the door to Base Rate cuts by the BoE.