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Arcadis calls peak inflation

Construction economists at Arcadis reckon that build cost inflation has now peaked and will substantially slow next year.

While falling inflation is generally something to be welcomed, it will be driving by a decline in construction workloads.

The UK’s construction market has reached a tipping point as the downturn arrives, according to analysis from Arcadis in its Winter 2022 Market View report.

Arcadis forecasts a divergence in inflationary pressures for buildings and national infrastructure projects as the high cost of finance for the private sector bites

Arcadis’ tender price forecast for 2023 confirms inflation likely to have peaked and will fall to just 2% for buildings, down from 10% in 2022. However, infrastructure is forecast to see a slower fall with 2023 inflation forecast at 6-7%.

The report says that all signals point to the slowdown having arrived. This evidence includes a 33% fall in the RIBA Future Trends Workload Index for architects in the last six months to a balance of -20 in October.

The Construction Products Association (CPA) predicts new-build output will fall by 3.7% in 2023 before recovering by 1.5% in 2024.

Simon Rawlinson, head of strategic research & insight at Arcadis, said: “With the chancellor shielding the public sector capital programme from market effects in the short term, our forecast is subject to even higher levels of uncertainty than usual. Many sectors, including infrastructure, industrial and even non-housing repair and maintenance are entering the downturn from a position of record workload, and there is a chance that not all sectors will fall into recession. “We expect input costs to continue to rise in 2023, but these won’t all be passed to clients. Competitive pressures in finance-driven sectors like housebuilding and commercial property will result in low tender price inflation.”

Ross Baylis, head of cost and commercial management, said: “Compared to the previous downturn in 2007 and 2008, today construction markets are increasingly varied, meaning that commercial pressures are applied in very different ways. Regardless of the model adopted, from JVs to vertical integration, inflation always needs to be absorbed somewhere in the chain, from self-employed labour to the client in a JV. As markets get tighter in 2023 and beyond, the level of absorption will increase and alongside that, so could the commercial stress.

“With energy and labour costs still likely to be significant cost drivers in 2023, such variation in practice and procurement means that clients and their advisors will need to think even more carefully about how their bid strategy will share the cost and price tension across the wider project team.”

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