A new government
It is clear that all major capital spend will be subject to a fresh audit process which will inevitably push back the roll out of major works programmes.
Will Labour pave the way for construction growth?
Reflecting on the Labour government’s legislative priorities, the impact on the construction industry could be significant. In a landscape of economic and political stability, where debt reduction will undoubtedly dominate, the new government has committed to develop a new industrial strategy, which plans to:
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Build 1.5 million new homes
Reform planning laws
Develop clean energy, via the new Great British Energy company
Create a National Wealth Fund to promote private investment, helping to fund gigafactories, clean steel plants, “renewable-ready” ports, green hydrogen and energy storage.
- Build 1.5 million new homes
- Reform planning laws
- Develop clean energy, via the new Great British Energy company
- Create a National Wealth Fund to promote private investment, helping to fund gigafactories, clean steel plants, “renewable-ready” ports, green hydrogen and energy storage.
In the public sector, Labour has ordered a review of the New Hospital Programme (NHP), as well as the cancellation of several major infrastructure projects. It is likely that other major capital spending will be subject to a fresh audit process which will inevitably push back the roll out of major works programmes.
Indeed, with private sector investment needed to bolster this programme, this is intrinsically linked to the overall health of the economy. Market data points to upcoming challenges for the UK economy which is likely to slow growth through to 2026. On a positive note, CPI inflation continues to ease and has now fallen to the Bank of England’s 2% benchmark target, earlier than was expected. A potential decrease in interest rates, as suggested by this development, could bode well for sectors like housing. The recent budget changes under the previous administration had a particularly negative impact on this sector.
Before the election, the economy moved out of technical recession with a modest 0.7% increase in GDP in Q1 2024, after two quarters of decline. In output terms, the production and services sectors grew by 0.6% and 0.8% respectively, but construction fell by -0.6%. The EU followed with broadly similar figures in Q1. General inflation continues to fall, mainly due to easing in energy prices. The base rate remains at 5.25% but with an increasing likelihood of a cut later this year. The Bank of England expects inflation to rise slightly over the next year or so before returning to the target in 2026. The key metric underlying all matters is UK aggregate government debt, which is currently equivalent to 103% of GDP and represents a huge budgetary burden in relation to the costs of debt service. The success with which the government can bring this down is therefore likely to have a direct bearing on the pace of roll out of the major public sector investment plans. Pledging to be fiscally responsible will limit their ability to invest through borrowing or raising taxes. This approach, while restricting their own spending power, aims to create a stable and attractive environment for the private sector to invest, ultimately driving economic growth. The scale of the task in hand is contextualised using data from within the G7 economies, where only Germany has had slower growth than the UK since the last quarter of 2019.
UK economic outlook
Before the election, the economy moved out of technical recession with a modest 0.7% increase in GDP in Q1 2024, after two quarters of decline. In output terms, the production and services sectors grew by 0.6% and 0.8% respectively, but construction fell by -0.6%. The EU followed with broadly similar figures in Q1. General inflation continues to fall, mainly due to easing in energy prices. The base rate remains at 5.25% but with an increasing likelihood of a cut later this year. The Bank of England expects inflation to rise slightly over the next year or so before returning to the target in 2026. The key metric underlying all matters is UK aggregate government debt, which is currently equivalent to 103% of GDP and represents a huge budgetary burden in relation to the costs of debt service. The success with which the government can bring this down is therefore likely to have a direct bearing on the pace of roll out of the major public sector investment plans. Pledging to be fiscally responsible will limit their ability to invest through borrowing or raising taxes. This approach, while restricting their own spending power, aims to create a stable and attractive environment for the private sector to invest, ultimately driving economic growth. The scale of the task in hand is contextualised using data from within the G7 economies, where only Germany has had slower growth than the UK since the last quarter of 2019.