The CPA’s forecast for construction output has been downgraded further in its Summer forecast due to the lagged impacts of the Middle East conflict that are starting to pass through to both the demand and cost sides of the UK economy.
Construction output year-to-date so far in 2026 has already fallen by 1.6%, according to the Office for National Statistics, even before the impacts of the conflict and it is now expected to fall by 3.3% overall in 2026.
This fall is due to activity weakening considerably in the key sectors of private housing new build and private housing repair, maintenance and improvement during the second half of the year.
Output is still expected to rise by 1.2% in 2027 but the risks remain heavily on the downside.
Private housing is the largest construction sector and house builders have begun to report that homebuyer demand has weakened sharply in recent months in line with the increase in mortgage interest rates since the Middle East conflict. This will exacerbate the issue of affordability, which was already a problem before the conflict, especially for buyers in areas of the country with higher house prices. In lower-priced parts of the country, house builders will have to deal with sharp cost increases when site viability is already an issue.
A spike in construction product prices in the second half of this year will come on top of a list of additional regulatory costs imposed over the last few years, with the Building Safety Levy coming into force in October 2026 and the Future Homes and Buildings Standard, which will be implemented in March 2027. Overall, private housing output is forecast to fall by 10.0% in 2026, a downward revision from -7.0% in the Spring forecast and output is forecast to remain flat in 2027, the same forecast as in Spring, but now from a lower level.
Private housing repair, maintenance, and improvement (rm&i) is the second-largest construction sector. Basic repairs and maintenance activities have largely continued as usual, but there has been limited activity in home improvement projects, typically the key driver of growth.
Even though many homeowners had the finances for projects over the last two years, they have increasingly focused on saving rather than spending, especially on discretionary, non-essential items such as home improvement projects, and this is likely to be the case as the cost of living rises in the next 12 months. In the long term, government-funded schemes for energy efficiency in the private housing stock may drive further growth in solar photovoltaic and heat pumps, although skills shortages may hinder this. Overall, private housing rm&i output is forecast to fall by 8.0% in 2026 and remain flat in 2027.
There is still expected to be significant growth in infrastructure, the third-largest construction sector, given longer-term existing contracts, pipelines of activity and funding in place for future projects. Energy generation and National Grid distribution work are expected to continue growing strongly, as is water investment.
There is greater uncertainty in rail, with the HS2 cost-saving ‘reset’ now expected to be published only in Spring 2027, and in roads, following the just-departed Prime Minister’s announcement that further defence spending would be partly funded by cuts to new roads projects. Overall, infrastructure output is forecast to rise by 3.2% in 2026, unchanged from Spring, and by 3.2% in 2027, a marginal revision down from 3.4% in Spring.
Commenting on the Spring Forecasts, CPA Head of Construction Research, Rebecca Larkin, said: “Construction activity so far this year is already lower than a year earlier and there is still considerable concern that we are yet to see the key impacts of cost inflation on projects down on the ground or the extent to which it affects appetite for signing up to or starting new projects.
“The biggest questions are how rises in construction costs, financing costs and the cost of living will affect the privately-financed sectors of private housing, private housing rm&i and commercial. Consequently, these sectors are forecast to experience the largest falls in output over the next 12-18 months.
“Even in areas where we forecast growth, there is an increased risk that rising cost inflation eats into the volume of construction work, even if the values of work are maintained. In addition, this rise in construction costs runs alongside the government’s imposition of 50% import tariffs for imported steel since 1 July 2026 and the prospect of even higher financing costs if the Bank of England raises interest rates, which make worsening viability a key barrier for new projects to progress.
“The arrival of the new Prime Minister emphasises that the new government will have to focus on enabling house building and construction demand, as well as focus on reducing cost burdens on the whole construction supply chain if it is serious about pledges for more new homes, more and better quality infrastructure and the Net Zero transition.
“This is a pressing issue as essential capacity and skills have been lost in the last two years and this will only get worse as activity falls over the next 12-18 months.”
