Arcadis has warned inflationary pressures will remain throughout 2022 and 2023 as soaring energy costs counteract falling commodity prices

The design and engineering consultancy says the current market cycle has now reached its peak and the first signs of a slowdown are appearing as wider economic gloom and unprecedented energy price rises make their impact felt.

The analysis is taken fromArcadis’ Autumn 2022 Market View, entitled Energy Sapping. 

The quarterly analysis of the UK construction market looks across sectors and regions to deliver a tender price forecast to inform clients about what is going on in UK construction, helping financial decision-making for projects and programmes.

It says so far this year, amid a background of inflationary pressures and dire economic forecasts from the Bank of England, the construction industry has maintained positive results as the strong rebound from the disruption of the Covid-19 pandemic has continued. 

Output statistics showed construction volumes hit an historic high in May 2022 and Q2 was the busiest quarter ever recorded. 

However, Arcadis warns signs of strain are starting to show - inflationary pressure shows no signs of easing, with material price increases continuing to be the main driver. 

Whilst there is evidence of price stability emerging, this is threatened by spiralling energy costs which, even with government support to keep prices at current levels, are likely to impact the costs of basic material production and their availability. 

According to Arcadis, this means the high inflation of the first half of 2022 is likely to remain.

The cost-of living crisis is also set to sustain upward pressure on labour costs which are likely to see catch-up pay demands in 2023 and beyond. 

These strains are starting to show their face in reporting, with total construction orders falling by 10.45% in Q2 on the previous three months, the largest quarterly fall since Q4 2020.

Arcadis says there’s hope that with the slowdown starting from a highpoint, competitive pressure will take the edge off future price rises and this will be a shallow but prolonged dip rather than a blow-out. But with a high degree of uncertainty around energy costs and availability, there is still a risk the crisis could escalate further and the slowdown could develop into a hard landing.

Arcadis has downgraded its overall outlook for buildings and infrastructure inflation from 2024 onwards, noting that although deflationary pressures have increased, risk associated with energy market disruption is likely to counteract this.

Its tender price forecast for 2022 is confirmed at 10% for buildings and 12% for infrastructure, the upper end of the previous forecast’s range

For the building sector, the forecast for 2023 is unchanged at 2-3%, however infrastructure has been increased from 4% to 5%, in recognition of high background demand and potentially greater exposure to material cost inflation

For 2024-2025, inflation forecasts have been reduced to account for the expected greater levels of competition across all sectors, however prices will remain high despite the weaker outlook for workload

Simon Rawlinson, head of strategic research and insight at Arcadis, said: “Whilst confidence in the construction market has remained more robust that the consumer market, it’s clear that the current cycle has peaked and we’re entering a period of slowdown. 

“However, just how severe the slowdown will be, and whether it will bring down costs, remains uncertain. 

“There are certainly signs that commodity prices are falling, but rising energy costs are baked-in, and their full impact yet to be felt. Therefore, we expect inflation to continue to be felt throughout the next 12-months and the effects of increased competition to eventually see inflation slow in 2024-25.”

Arcadis has also considered what can learned about the direction of the market by examining previous cycles and downturns – with the 2008-2012 crash doing huge damage to the industry.

However, Arcadis says conditions are markedly different this time, with so sign of collapse on the demand side. 

Ross Baylis, head of cost and commercial management, added: “When the global financial crash of 2008-2012 ushered in the last protracted downturn, significant damage was done to collaboration in the industry as investment dried up and clients turned to single-stage tenders to increase competition. 

“This came at the cost of team focus and integrated working practices which left a lasting impact of sub-optimal outcomes. It’s hoped these lessons can be learned this time and demand can hold up well enough to maintain good working practices across all sectors.”

Click here to read the full UK Autumn Market View.