Reasons for optimism and pessimism in the construction industry in 2025

A week is a long time in politics, so goes the saying. If that’s true, the past month could feel like an eternity for the fledgling Labour government. As 2025 began, concerns over economic instability – which included criticism of Rachel Reeves’ fiscal policies – appeared to be so grave, her position as chancellor looked precarious. However, as the first month of the year draws to a close, concerns around the bond market reaction to the Autumn Budget appear to have eased as gilt yields declined. Reeves’ confidence, conversely, was on the up as she looked to attract investment for the UK’s growth plans at the World Economic Forum in Davos last week; and, most recently, her unveiling of a slew of new measures to ‘kickstart economic growth’, including support for a third runway at Heathrow.

But with such a turbulent start to the year, can we draw any definitive conclusions from the evidence we have? Indeed, the outlook appears mixed. Here, we explore reasons to feel both optimistic and pessimistic about the industry’s prospects this year.

Reasons for pessimism

High inflation and borrowing costs

Inflation has been above the Bank of England’s 2% target for three months in a row, while borrowing costs continued to rise. This led to fears the UK could dip into stagflation, the dreaded combination of creeping inflation and low growth. Higher interest rates also affect mortgage rates, government borrowing, and ultimately filter down to project costs, straining developers’ budgets.

Fiscal constraints

The government’s fiscal buffer, intended to absorb shocks from rising interest rates, could potentially erode, due to a rise in government borrowing, which reached £17.8bn last month, the highest December level for four years. This leaves limited room to manoeuvre without resorting to further borrowing, cutting public spending, or raising taxes, all of which could impact construction funding. The cost of borrowing also tends to get passed down, with mortgage rates set to be impacted.

Marginal growth

Hopes have been buoyed by the latest Office for National Statistics (ONS) figures. They show the UK economy returned to growth for the first time in three months, with a 0.1% uptick in gross domestic product (GDP); an encouraging sign for the sector. However, the figures are less than expected and with tax hikes for employers due to come in April, there are fears this could push up tender prices and further compound sluggish growth. The repercussions of October’s budget on investor confidence could be coming home to roost.

Uncertainty and delayed decision-making

Delays in the government confirming the National Infrastructure and Construction Pipeline continue a long period of uncertainty for the sector. Large projects such as the Lower Thames Crossing are now dependent on private finance, which means it’s vulnerable to further delays and prolonged timelines; leaving contractors and subcontractors in limbo, unable to plan ahead or prepare for tendering. However, the second part of the spending review is due to be announced in the spring, which should bring some more certainty to investors.

Skills shortages exacerbated by financial constraints

The industry faces chronic skills shortages caused by Brexit and an exodus of trained, experienced workers. This could also continue to be exacerbated by financial constraints that companies are facing; when companies are struggling to stay afloat, training is one of the first things to go, especially for small businesses or sole traders. This also perpetuates an over-reliance on subcontractors to deliver specific skills.

Housing targets falling short

Angela Rayner’s ambitious housing targets – 1.5 million to be delivered over the Parliament – appear ambitious, to say the least. Within the government’s first six months, completions are declining, planning permissions are at record lows, and housing new orders continue to fall. If this trend continues, the less credible the government’s plans will look; fuelling further uncertainty for the private sector, as well as eroding its ability to plan long-term.

Companies could discard sustainable practises

‘Survive until 25’ was a mantra oft repeated throughout the sector last year. With ‘Hibernate till 28’ now taking its place, companies are continuing to focus on survival, putting green initiatives at risk; as there tends to be an assumption these will cost more. This could be compounded by the requirement to comply with the Future Homes Standard, due to come in this year. With extended sign-off periods causing more potential delays, the industry’s main focus could centre around maintaining the bottom line where possible. Anecdotal evidence also suggests the sector is prioritising business-critical projects; such as those required by legislation or essential maintenance for schools. This could limit broader investment and growth opportunities.

Interest rate policies

The lack of a pre-Christmas interest rate cut by the Bank of England has been criticised, with the Monetary Policy Committee voting to maintain Bank Rate at 4.75%. Some argue that stimulating the economy should take precedence over inflation concerns, as a stagnant economy poses greater risks long-term. It’s anticipated there will be a further cut to the base rate in early February, which could contribute to stimulating growth.

Reasons for optimism

Improved construction output data

According to the latest ONS data, total construction output increased in November 2024, despite the stagnant economic backdrop, by 0.4% compared with the previous month. New work output was up by 0.3% while repair and maintenance output increased by 0.5%. And, although total output overall is expected to have declined overall in 2024, BCIS is expecting recovery throughout 2025, with the potential to accelerate through 2026, driven by increases in output in both sectors.

Similarly, November 2024’s GDP figures indicate that parts of the economy are more resilient than anticipated.

Opportunities in retrofitting and sustainability

The focus on retrofitting – as driven by the National Planning Policy Framework (NPPF), which ‘encourages’ it, and local government planning policies – could help to address housing shortages while supporting net zero strategies and sustainability goals. This could contribute to construction output growth while reducing carbon emissions and revitalising town centres with existing infrastructure.

Innovation and new markets

Advances in artificial intelligence – as anticipated through the AI Opportunities Action Plan announced in the Prime Minister’s speech earlier this month – and electric vehicle manufacturing position the UK as a leader in these high-growth sectors. These innovations could create spillover benefits for the construction industry, particularly in specialised projects.

Growing momentum for green initiatives

Demand for sustainable building practices continues to rise; driven, in part, by global financial institutions that see its potential as a growth area. And with the data and tools in place, the industry is continuing to forge ahead with its aim to lower carbon emissions – newly-developed standards, such as the Net Zero Carbon Building Standard; that’s aligned with the updated RICS whole life carbon assessment standard – will help developers and contractors design more energy-efficient buildings that emit less carbon over their life cycle.

Opportunities in training and skills development

While skills shortages remain a concern, the government is attempting to address this with the announcement of 5,000 additional construction apprenticeships per year. This demonstrates a growing recognition of the need for industry-led training initiatives. Renewed focus on upskilling workers could help address long-term workforce challenges, while highlighting clear career paths from trades to management may also help attract younger workers to the sector. And although the government has announced plans to reduce net migration, it is aiming to expand visa routes for people who have skills in growth areas, such as construction. This will become even more important as demand picks up.

Pipeline and private investment

The potential for projects such as the Heathrow expansion and Lower Thames Crossing to finally move forward could provide much-needed certainty to the sector and help to stimulate private investment. This could also help companies to proactively plan and ensure they have a clearer idea of the skills they need to invest in. Delays to large infrastructure projects increase costs, but their eventual approval could signal a serious government commitment to economic growth.

Trump presidency

Uncertainty around President Donald Trump’s policies could be contributing to a lack of investor confidence across the globe, not just within the UK. However, although the prospect of higher tariffs being introduced on imports to the US is concerning many world leaders, the UK doesn’t have a trade deficit with the US; Reeves also remains confident that trade between the UK and the US could potentially increase during Trump’s second term. The impact of the USA’s withdrawal from the Paris Agreement and the Green New Deal remains to be seen. But it should not indicate a sign for the UK construction industry to waver from its commitment to reducing carbon emissions.

Conclusion

Despite the numerous challenges the construction industry faces in 2025 – from further financial pressures that include National Insurance hikes and uncertainty surrounding the ever-strained economic backdrop – there are reasons for the sector to be optimistic. While new work output could be driven by technological advancements and sustainable practises, government investment in training programmes could help to mitigate skills shortages.

However, although government support for Lower Thames Crossing and the Heathrow expansion heralds a positive signal for the industry, these projects won’t have an immediate impact on growth. The industry desperately needs the government to commit to infrastructure pipelines to reduce uncertainty and give the sector the opportunity to plan; this could also help to mitigate the risk of smaller businesses and contractors becoming insolvent. In turn, this would improve investor confidence in the UK and help to kickstart and stimulate growth to avoid stagflation. The expansion of visa routes could also tackle the skills shortage, which means that when demand does pick up, we’re in a better position to provide the labour required.

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