INDUSTRY ANALYSIS
A RETURN TO UNCERTAINTY
What does the current global instability mean for UK construction? Tom Hall, Chief Economist at Aqua Consultants, explains
T he hope of a return to calmer times has been during the second half of last year weighed on business and consumer confidence, and now the new US administration has declared trade war on the rest of the world, creating international turmoil. Positively, the direct impact of US tariffs on construction is likely to be limited. Most UK construction dashed. Pessimism over the state of the UK economy materials are sourced locally or from near neighbours. In fact, there are several potential upsides: ● the EU now has an incentive – alleviating the impact of US tariffs – to negotiate a reduction of post-Brexit trade barriers with the UK; and ● an increase in goods from China previously destined for the US may have a downward impact on inflation. The elephant in the room is the uncertainty (Fig. 1) that plagued the last decade: domestic political upheaval, Brexit, the Covid pandemic and its aftermath, and the lack of a long-term public investment strategy sapping business confidence and private sector investment. With a highly volatile US administration, uncertainty is going to be the norm rather than the exception for the next four years. Turning to UK construction, output was subdued over 2024. Overall momentum was flat, but this masked a fall in new work over the
Figure 1: World Uncertainty Index
incomes not seen since 2015 (Fig. 2). However, households have not been spending in the face of bad economic news, they have been repairing their finances after the fall in real incomes over 2022-23. As a result, the savings rate climbed to 12 per cent in Q4 2024 (Fig.2). Ignoring the anomaly of the Covid pandemic, this is the highest since the 2008 financial crisis, which peaked at 12.5 per cent in Q1 2010. Turning on the taps Households are unlikely to maintain this rate of saving and will start turning the spending taps back on. There remains a high level of demand for UK housing after interest rate rises of the last few years priced many people out of the market. The Bank of England, ever fearful of a wage-price spiral, won’t lower the base rate until inflation is under control. The market has priced in three further rate cuts this year, but rates will stay high for longer. The housing market will return slowly over the next few years, particularly with the lack of any tangible progress on labour and materials constraints. On the supply side, planning reform should streamline planning decisions, removing a blocker from timely development. Uncertainty is here to stay but the outlook for construction is positive – the recovery has just been pushed back for a period, and when it comes, it will be slow and steady.
Apr 64
Jul 09
Oct 54
Source: worlduncertaintyindex.com
Dec 99
Figure 2: Real Wages and Consumer Savings Rate
12%
8%
Savings rate Real wages
4%
0%
-4%
Source: ONS
-8%
first half of the year. So far in 2025, new work has remained subdued. New orders have also been slow, with a pickup in Q2 2024 – likely due to optimism from the change of government – but activity has since fallen off. There are reasons to be cautiously optimistic. While consumer confidence has remained fragile since the change in government, wages have averaged three per cent above inflation for the last year, contributing to an increase in real
Tom Hall
17
Master Builder
www.fmb.org.uk
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