Economic overview

Inflation burns bright under darkening economic skies

Following a welcome upward revision to Gross Domestic Product (GDP) figures, economic growth in the United Kingdom (UK) increased by 0.2 percent in Q2 2022. However the reality is that the UK economy is weakening, as evidenced by a 0.3 percent fall in GDP in August 2022.

Since the start of the year, softening business sentiment, coupled with rapidly rising inflation and more stringent financing conditions, has greatly increased the possibility of a recession. The UK’s political instability is also not helping to instil confidence in the economy.

The cost of living, recorded by the Consumer Price Index (CPI), rose by 10.1 percent in the 12 months to the end of September 2022. In response, the Bank of England (BoE) has increased interest rates no fewer than seven times, taking the base rate to 2.25 percent in September 2022, its highest level for 14 years.

The continued rise in gas prices has also dealt a series of blows to activity in the UK and the rest of Europe. As a result, the BoE has projected that the UK is likely to enter recession later this year, with GDP growth expected to be subdued well into 2025 – see Figure 1.

Source: Bank of England

Despite the weakening economic outlook, the UK labour market remains buoyant with unemployment especially low by historic standards, standing at just 2.8 percent in Q2 2022. Tightness in the labour market pushed up the average worker’s regular pay by 5.4 percent in the year to August 2022, even though the rising cost of living meant their pay fell by 2.9 percent in real terms.

After dipping briefly in August 2022, annual CPI rose to 10.1 percent in September, its highest level in 40 years. Such punishingly high inflation continues to have a negative effect on GDP growth, curbing both consumption and investment decisions.

Nonetheless, a market contraction is a real possibility. However, if the slowdown does turn into a recession, more focus should be placed on the duration and depth of any contraction than the fact of a technical recession itself. The shorter and shallower any recession is, the better for the UK and its construction industry.

Despite the resilience the UK construction industry has shown during and after COVID-19, cracks are starting to appear in the foundations of its growth. The feasibility of works has been adversely affected by price increases, shortages or extended lead-in times for materials and specialist equipment.

Monthly construction output fell by 0.7 percent in June 2022, the largest decrease since October 2021, and the October 2022 S&P Global Construction Purchasing Managers' Index (PMI) remained below the 50-point no-change mark. One silver lining, however, was further revisions to statistics meaning that July 2022 returned to growth. Better still, both the month on month and three-monthly growth rate in construction during August 2022 increased by 0.4 and 0.1 percent respectively.

Construction’s forward indicators are less than promising. Total new orders dropped by 10.4 percent in Q2 2022 compared to the previous quarter. This was the second consecutive quarterly drop, taking the total fall in the first half of 2022 to 13.5 percent. New orders typically lead construction output by a couple of quarters, so output growth may soften further this year.

Source: Office for National Statistics

For now, activity levels remain resilient in new-build sustainable construction, as well as in the retrofitting of better insulation and energy-efficiency to existing properties. Yet as rising tender prices combine with growing fears of a recession, some clients may be tempted to push for cost savings by reining in, or at least rethinking, their sustainability goals.