In focus UK

General economic overview

Inflation was at 9 percent in May, the highest level in 40 years, and is being driven by increased fuel costs, and disruption to the supply chain caused by the pandemic, Brexit and the war in Ukraine.

Average wage growth was 4.8 percent for the year to January 2022, indicating a fall in real wage incomes. Until recently, wage increases were mainly occurring where workers changed jobs, especially to the sectors with labour shortages, but more recently, demands for higher wages are emerging in the wage settlement process. Skills shortages in the UK remain a problem, with the number of job vacancies increasing from 765,000 to 1.3 million in the year to the three rolling months to May 2022.

Construction sector performance

Overall, construction grew by a record 12.7 percent in the 12 months to December 2021, but this is relative to the exceptional fall in construction caused by the pandemic in 2020. In February, construction finally exceeded pre-pandemic levels by around £35m.

Bottlenecks in the supply chain appear to be easing slightly. However, supply chain problems are magnified by Brexit because many businesses are still working through the increased paperwork and new logistics for doing business with the EU. This is still curbing the flow of goods. Cost reimbursable contracts are being seen more often, as contractors remain nervous of further cost increases. Currently roof tiles, bricks and blocks, plastics and paints and electrical products are the items experiencing longest lead times. Timber, steel and plasterboard were in short supply in early 2021, but the situation has recently improved.

Overall, according to the Office of National Statistics, construction costs increased by 6.6 percent for new work in the year to December 2021, with new residential construction leading the pack at 9.9 percent. This may be enough to prevent some larger housing construction schemes with marginal returns from proceeding at all. Higher energy prices, adding to transport costs and higher materials prices with longer lead times are still major challenges for contractors.

Progress of the environmental agenda

With the UK being highly dependent on oil and gas for its energy needs, the war in Ukraine is especially challenging. However, the dual concerns of higher energy costs and energy security is driving organisations to seek ways to accelerate their renewables agenda. This is likely to act as a catalyst for new clean energy projects.

In 2021, Envision announced the construction of a £450m battery gigafactory in the Northeast, as part of a £1bn partnership with Nissan UK and Sunderland City Council. The UK plans to stop the sale of diesel and gasoline cars by 2030.

The UK Prime Minister has a green “ten-point plan” which includes increasing offshore wind generation, hydrogen, nuclear, electric vehicles, public transport and walking, jet zero and greener maritime, homes and public buildings, carbon capture, natural environment and finance for innovation.

Future outlook

The future looks cautiously optimistic. There are numerous speedbumps ahead, some of which are unique to the UK, such as working out how to trade with the EU in a post-Brexit world. Higher interest rates, higher taxes, an increase in national insurance to bolster the national health system, and the prospect of an inflation wage spiral indicate that continued growth may not be sustainable.

Gradually, supply bottlenecks should ease and some of the factors driving inflation should abate. Meanwhile, the UK is undergoing a fall in real disposable incomes which threatens to slow growth later in 2022. The government will need to tread carefully in its policy settings and budget to ensure that growth is not held back further.

Spotlight - Project EC Move

Following the Executive Committee (EC) decision to move the board from The Hague to London, the EC floors need to be developed in Shell Centre on 23rd and 24th, and partially on the 22nd floor. They have a strong representational function and need to be synced together, thus a placement of an internal staircase is part of Project Verve’s scope. This adds to one of the many challenges to the demanding timeline.

Project Verve was initiated in November 2011 and has completion of works now planned for June 2023.