Economic overview
Two years on from the start of COVID-19, UK Gross Domestic Product (GDP) has bounced back past its pre-pandemic level.
In February 2022, it climbed to 1.5 above its February 2020 level. Ripple effects remain, yet the year started on a firmer footing than the last. This respite, however, was as welcome as it was fleeting.
Since February, the world over has been rocked by war in the Ukraine – from both a humanitarian and an economic perspective.
Domestic and international markets are now grappling with the fallout from a raft of political sanctions, rising energy and commodity prices, renewed supply chain disruption and a refugee crisis.
Layered on top of pre-existing issues, these exceptional conditions will test the mettle of the UK’s budding economic recovery following COVID-19.
Whilst inflationary seeds were sown prior to the conflict, the outbreak of war rapidly ratcheted up price pressures further. In March, the Consumer Price Index hit a 30-year high and the Office for Budgetary Responsibility now expects it to hit 8.7 percent towards the end of 2022.
Office for National Statistics, Office for Budgetary Responsibility
As a result, the Bank of England now expects GDP to expand at a slower rate, growing by roughly 1.0 percentage point less than it previously forecast for 2022. The slowdown may become even more acute as rising inflation makes wages fall in real terms and consumer spending tails off.
Challenging though the current situation is, UK construction is at least confronting this renewed market turbulence from a position of strength.
Figures from the Office for National Statistics show that construction output expanded by 2.4 percent in the three months to the end of February 2022. This is three times faster than services and well above total production and agriculture, which are the other key areas of UK economic activity.
Confidence amongst contractors operating in the UK construction industry was also high towards the end of last year, as seen in Figure 2, though sentiment is likely to have taken a knock following the outbreak of war in Ukraine.
Turner & Townsend contractor survey: Q4 2021
This has not yet triggered an abrupt fall in construction output. In March, the S&P Global / CIPS UK Construction PMI recorded its joint-fastest rate of output growth since June 2021. Construction orders similarly grew at their fastest pace since August 2021, suggesting that the health of the UK construction industry remained robust during the first full month of the war.
However, rapid input cost escalation is translating into higher tender price inflation allowances. This may yet feed into a slower uptake of new work as firms are increasingly scrutinising cost viability, mulling over investment decisions due to amplified uncertainty and managing growing risk allowances.
Ultimately, the impact of Russia’s war with Ukraine upon the UK economy and its construction industry will depend on the extent to which the conflict, and the severity of sanctions and economic disruption, escalates and how long it lasts.
Yet for all the uncertainty, there is consensus around one thing. Materials prices have begun rising and, coupled with rising labour costs, this is set to push up tender prices sharply. In response, clients will need to be both agile and strategic in the way they manage the impact of a complex, fast-moving and highly inflationary environment.
Economic data
GDP at (market price) index
Q4 2021: 100.2 Q3 2021: 98.9 Increase: 1.3%
Bank of England base rate
Mar 2022: 0.75 Dec 2021: 0.25 Increase: 0.50 Base points
Consumer price inflation
Mar 2022: 117.1 Mar 2021: 109.4 Increase: 7.0%
Unemployment level (thousand)
Q4 2021: 1,374 Q3 2021: 1,448 Decrease: -5.1%
Construction output index
Q4 2021: 95.6 Q3 2021: 94.7 Increase: 1.0%
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