Special report: Headwinds move from gust to gale

Against warnings of recession from the Bank of England, economic activity held out in the three months to May 2022, growing by 0.4 percent. Gross Domestic Product (GDP) also grew by 0.5 percent on the month in May 2022, surprising many analysts, increasing after a decline of 0.2 percent in April 2022. Even so, the economy is weakening, with month on year growth in May 2022 subsiding to 3.5 percent, its lowest figure for two years.

Inflation, exacerbated by war in Ukraine, rising energy costs and repeated lockdowns in China, is arguably the biggest threat to growth. The surging cost of living has already dented consumer spending as people’s disposable incomes are cut.

The continuing rise in the Consumer Price Index (CPI) is also a threat to growth and optimism. It reached 9.4 percent on the year in June 2022 and many commentators expect it to hit double digits later this year – even though there is a belief that some price effects will subside in 2023.

Interest rate increases are a major reason for that optimism, yet they are a double-edged sword. Should the Bank of England rapidly increase the base rate beyond its current 1.75 percent level, there is a risk that the economy could cool further. Credit availability has reduced, and the amount at which loans need to be repaid has gone up, contributing to reduced levels of consumption.

Insolvency in focus

In the two and a half years since COVID-19 arrived in Britain, UK construction has endured a rollercoaster ride in demand, supply and project risk and opportunity.

Lockdown-era delay pressures and schedule overruns have given way to soaring input costs and intermittent availability of key materials, first as global demand rebounded and then as the war in Ukraine disrupted international supply chains.

But hopes that surging cost inflation would be the final sting in the pandemic’s tail now look premature, as recessionary clouds gather over the UK economy and the construction industry sees the unwelcome return of an all too familiar spectre – insolvency.

This edition of the UKMI brings mixed tidings in reflection of the marked variance in differing economic indicators. While our analysis finds that inflationary pressures are likely to peak this year before subsiding in 2023, supply chain stress – and the disruptive threat of contractor and sub-contractor failure – is growing.

Furthermore, the inflationary and insolvency threats are increasingly intertwined. Tackling them together will require a pragmatic approach to project and programme delivery.