Inflation added £23bn to the cost of construction in 2022

Rising costs add £23bn to the cost of construction output when compared to pre-pandemic price levels; inflation pressures are expected to continue through the first half of 2023.

The Office for National Statistics (ONS) has released data on the construction output of the United Kingdom covering all 12 months of 2022 last week.

The figures show that the total construction output value reached almost £205bn, marking the first-time annual construction value has surpassed £200bn and representing a 15% rise from 2021 output values in nominal terms.

Despite forecasts at the midpoint of 2022 being closer to £186bn, the new data reveals a remarkable rise in construction output value, driven by the inflationary effects of post-Covid-19 shortages, the war in Ukraine, and the cost-of-living crisis driving up energy and material prices.

Barbour ABI analysis of real versus nominal price indices showed the value would have been closer to £181bn if prices had remained at pre-pandemic levels. This means approximately £23bn has been added to the cost of UK construction since 2019.

Barbour ABI’s AMA Research Director, Laura Pardoe explained: “Price rises were at record levels over Summer 2022, with many goods seeing 25% annual inflation. This has now dropped closer to 15%, but some products still hover well above 20% and insulation products have recently jumped to 50%.”

Looking ahead, the UK economy is facing multiple headwinds, which could reduce the viability of many building projects.

Barbour ABI Chief Economist Tom Hall commented: “The Bank of England’s decision to increase the base rate to 4% is likely to weigh heavily on the residential sector over 2023 as mortgage holders tighten their belts. Added to this, the UK economy is widely predicted to stagnate as a best-case scenario over the short-term, which may well see other commercially sensitive sectors dependent on consumer spending also fall.

Construction product inflation and shortages are expected to ease over the second half of 2023 but will not return to the stability in the 2010’s. Contractors are working on razor-thin margins. All in all, 2023 is likely to be another bumpy year.”

Nevertheless, Barbour ABI also saw high levels of contract awards agreed throughout 2022, which reached a record high in Q1 2022. As a result, Barbour ABI is predicting high levels of activity in construction during 2023 in the infrastructure, warehousing, and health sectors.