The UK economic outlook is limited, with real GDP growth expected to grow just 1.0% in 2025 and 1.3% in 2026. The UK Autumn Budget 2024 represents an increased risk to near-term growth. It raises significant revenue to address a budgetary 鈥渂lack hole鈥� of 拢21.9 billion, largely through increased labor taxes.

This represents a risk to business investment, and higher business costs could result in weaker job creation. Also, high interest rates will impact about 3 million homeowners who are paying fixed rate mortgages of under 3%, with most of these set to expire by the end of 2026. Meanwhile, price levels of essential goods remain troubling with electricity, gas and other fuel prices 38% higher in October 2024 than their levels in October 2021. Finally, the impact of higher tariffs on US imports of goods to start in the second quarter of 2025 (the US being the UK鈥檚 largest export market) will be a blow to an industrial sector already facing higher labor taxes from April 2025.

Real total construction spending in the UK likely declined by 2.8% in 2024. As economic and financial conditions improve, growth should rebound to 2.7% in 2025.

UK construction activity falls for first time since in 10 months Construction buyers reported a decline in activity in the UK for the first time in 10 months in January 2025.

Maintenance

The latest data from the Office for National Statistics (ONS) shows that construction output in Great Britain rose 0.8% quarter over quarter in the third quarter of 2024, following three consecutive quarters of decline. The quarterly rebound was driven solely by a 2.0% increase in new work, as repair and maintenance fell by 0.6%. Meanwhile, the volume of new orders fell 22.0% quarter over quarter in the third quarter, following two consecutive quarters of growth.

At the sector level, housing new orders fell 32.6% to a near five-year low, while commercial orders fell 20.8%. Orders also fell sharply in both public (down 28.0%) and industrial (down 26.9%). Total new orders were also down 9.4% compared with the same quarter in 2023 but were up 4.6% year to date. More timely indicators of construction activity, such as S&P鈥檚 Global/Chartered Institute of Procurement & Supply (CIPS) Purchasing Managers鈥� Index鈩� (PMI庐), have shown an upward trend in recent months.

That said, the pace of output growth and new orders eased in October 2024, and business optimism regarding the next 12 months fell to a 10-month low.

Residential construction spending likely contracted 2.0% in 2024, but higher real incomes and lower mortgage rates should drive a recovery to 3.5% growth in 2025. Most UK mortgages are fixed-rate, and the Bank of England projects around 800,000 fixed-rate mortgages with an interest rate of 3% or below to expire annually through 2027. Many homeowners are likely to experience higher monthly repayments as they remortgage.

After two years of decline, the housing market has shown signs of recovery with the number of mortgages approved for house purchases rising 29.9% year over year in the first three quarters of 2024, while the number of property transactions rose 3.2%. Further interest rate cuts by the Bank of England should lead to continued improving demand for housing in 2025. Yet, indicators of new housing supply have remained poor. Total housing orders continued their decline in the first three quarters of 2024, by 14.7% year over year.

National House Building Council data also showed that the number of new homes registered to be built in the UK fell by 7.4% in the first three quarters of 2024 compared with the same period a year earlier. There were tentative signs of a pickup in activity as new home registrations rose 40.5% year over year in the third quarter, following seven consecutive quarters of annual decline.

Nonresidential to decline

Nonresidential structural construction spending likely declined 2.5% in 2024. As investor confidence improves amid easing financial conditions, growth is projected to pick up to 2.1% in 2025 and 2.6% in 2026. The Bank of England鈥檚 agents鈥� summary of business conditions covering the third quarter of 2024 showed that new commercial development was still down compared with the same period a year earlier, particularly for traditional office space. High funding and build costs continue to weigh on investor sentiment, especially given the risk around potential returns for developers.

Subcontractor failures, long planning processes and national budget uncertainty have also dampened investor confidence. Still, there is a growing focus on office refurbishments driven by the flight to quality as occupiers seek modern and sustainable buildings that meet environmental, social and government (ESG) requirements.

This trend is likely to continue in the near term, especially given the financial risk associated with new build projects and the prospect of tighter minimum energy efficiency standard (MEES) regulations. Deloitte LLP鈥檚 London Office Crane Survey Summer 2024 revealed that 42 new office projects, totaling 4.2 million square feet, broke ground in the six months to March 2024.

While this is an 18% decrease compared with the Winter 2023 survey, the volume of new starts remained well above the 10-year average of 3.3 million square feet. This marked the eighth consecutive survey where refurbishment exceeded new builds (2.8 million square feet versus 1.4 million square feet). The shift toward refurbishments is being driven by the anticipated tightening of MEES regulations and hybrid working that is fueling demand for high-quality space. The survey, however, revealed that investors remained cautious on large-scale developments owing to the impact of high financing and construction costs on returns.

Decline in spending

Infrastructure construction spending likely declined 4.8% in 2024, even as work continued on major projects under five-year spending plans in roads, rail and water. This reflects delays and cancellations to several planned transport projects, particularly roads, which will limit the pace of recovery anticipated in 2025 to 2.0%. Activity in transportation will continue to be driven by five-year funding programs. This includes Network Rail鈥檚 Control Period 7 (CP7), which will see 拢42.8 billion invested through March 2029.

The CP7 funding is lower than the 拢43 billion spent during CP6, with the focus on operations, maintenance and renewals, with increased investment in tackling climate change and improving train performance. National Highways is delivering the Road Investment Strategy 2 (RIS2) through March 2025, to be replaced by the third Road Investment Strategy (RIS3) through March 2030.

There is a risk with the draft publication of RIS3 delayed until the spending review in 2025. Several infrastructure projects have been affected by high costs and supply chain disruptions. In March 2023, major road projects planned for RIS2 were pushed back to RIS3, and projects earmarked for RIS3 were deferred to RIS4, covering the 2030鈥�35 period. The new government cancelled several road and railway projects to save 拢5.5 billion in 2024 and over 拢8 billion in 2025.

The Autumn Budget 2024 cancelled five more road projects, worth over 拢1.3 billion. The various project delays and cancellations imperil the delivery of the National Infrastructure and Construction Pipeline. The updated pipeline consists of 拢700 billion to 拢775 billion of planned and projected investment in 660 projects over the next 10 years. Of this, 拢164 billion is to be spent on major infrastructure and construction projects by 2024鈥�25, an average of 拢82 billion per year. A breakdown by sector shows that energy (拢36 billion per year to 2024鈥� 25) and transport (拢19 billion per year to 2024鈥�25) are the highest-value sectors in the next two years.

About the author

Scott Hazelton is a director with the Global Construction team at the market analyst S&P Global. Scott has over 30 years of experience in construction, heavy equipment, building materials and industrial manufacturing markets.