What is the economic outlook for 2026?

As we approach the close of 2025, the UK construction sector is navigating a complex landscape marked by significant headwinds.

With GDP projected to grow by around 1.5% this year, placing the UK among the faster-growing G7 economies, construction output has also increased by approximately 1.5% in 2025 so far, making a positive contribution to overall economic expansion.

Nevertheless, this headline resilience conceals underlying fragilities: sectoral performance is diverging sharply, and confidence remains cautious amid ongoing domestic policy uncertainties and geopolitical pressures.

The banks' interest rates remained at 4% in November after a narrow 5­­:4 vote, but signalling from Governor Andrew Bailey, who cast the deciding vote, has since opened the door to a December rate cut.

Bailey described inflation risks as 'less pressing' and expressed preference to 'wait and see if the durability in disinflation is confirmed', which represents a pivot that markets have interpreted as a precursor to further easing.

The fact that since those comments were made unemployment has risen to 5%, the highest since the pandemic, only reinforces the more dovish stance.

As a result, Oxford Economics now expects the base rate to reach 3.25% by the end of 2026.

This marks a significant departure from earlier autumn expectations. Inflation, which peaked at 3.8% in the latest reported data, is now forecast to ease more decisively.

Pantheon Macroeconomics revised their 2026 inflation forecast downward to 2.8% following softer-than-expected September data, while Capital Economics expects the chancellor's Autumn Budget to deliver a disinflationary impulse, potentially including VAT cuts on utility bills.

For an industry where project viability hinges on financing costs, this monetary shift could prove significant.

Repair and maintenance (R&M) activity has become the engine of growth, with output increasing over 35% since 2019, an average annual growth rate of nearly 9%.

By contrast, new work remains approximately 7% below pre-pandemic levels, having declined throughout 2023 and 2024, before modestly recovering this year.

The most recent RICS survey data reveals deteriorating sentiment of late, with the headline workloads net balance turning negative (-8%) for the first time in several quarters.

New project activity weakened markedly (-13% net balance), while R&M work stabilised (+2% net balance), albeit this is well down from previous strength. The divergence between sectors is stark.

While private housing and commercial sectors all slipped further into contraction, infrastructure stands above the field (+8% net balance).

Looking closer at official output data, infrastructure continues to justify its reputation as the sector's anchor. Year-to-date growth exceeds 5%, with the annual output pipeline valued at £30bn. 

Energy and water sub-sectors show particular vigour, registering net balances of +29% and +18% respectively in RICS data.

The Construction Products Association (CPA) forecasts that infrastructure output will rise by 4.4% in 2026.

Major projects including HS2, Hinkley Point C and offshore wind developments maintain momentum, supported by confirmed government funding and a £28bn annual investment envelope.

The government's target of building 1.5m homes by 2030 requires 300,000 annual deliveries, which is 40% above current rates. Even the CPA's optimistic 7% growth forecast for 2026 would leave a shortfall of at least 250,000 units against that target.

The Autumn Budget's potential property taxes, including council tax reforms and possible mansion taxes, could further dampen high-end transactions, though the broader impact of lower interest rates may provide offsetting support.

Commercial construction remains the laggard of the sector, with output down 8% in 2025 and nearly 30% below pre-pandemic levels. Structural shifts in office and retail demand continue to weigh on activity, though warehousing, logistics and data centres offer respite.

Public housing faces headwinds from elevated costs and regulatory delays, despite the new £39bn Social and Affordable Homes Programme 2026 to 2036.

Alongside this, another frequently cited challenge remains planning and regulation, highlighted by 62% of RICS respondents, a share that has risen consistently over two years.

Prolonged approval times, a mounting backlog of applications and heightened compliance demands under the Building Safety Act are hampering new project starts.

Building Safety Regulator approval delays are now commonplace, creating resourcing challenges and margin pressures across the supply chain.

Insufficient demand for construction works has emerged as a growing concern, with 41% of surveyors citing it as a negative factor, the highest level since 2013 excluding the COVID-19 lockdown periods.

Labour shortages, while gradually easing according to 37% of respondents, remain problematic. Surveyors consistently report that any significant upturn would quickly expose capacity constraints, particularly in skilled trades.

The Autumn Budget looms large – Capital Economics expects to see cumulative tax rises of £38bn, making it nearly as significant as the chancellor's first Budget.

While this fiscal tightening could trim GDP growth by 0.3%, it should prove disinflationary, supporting the Bank of England's easing cycle. The package is expected to target higher earners, potentially including landlords and property owners, with two-thirds of the burden falling on households.

For construction, the composition matters. Potential council tax reforms and new property taxes may dampen high-end residential activity, but the overall effect of credible fiscal consolidation could reassure bond markets and prevent gilt yield spikes that would be particularly damaging to long-term infrastructure financing.

The chancellor has vowed to avoid inflationary tax hikes, suggesting the package will prioritise other tax increases over VAT or duties, which would be more problematic for the sector.

The key variable remains timing. The sector's interest-rate sensitivity means it will be among the first to benefit from cheaper borrowing, potentially reviving stalled projects and improving development viability.

Activity has softened, confidence is muted and structural challenges around planning and skills persist. Yet the macroeconomic environment is shifting more favourably than seemed possible just weeks ago.

The prospect of a December rate cut, followed by further easing through 2026, provides a tangible catalyst for recovery. However, the pace of that recovery will be incremental and sectorally uneven.

The Autumn Budget's credibility will be crucial – sensible fiscal consolidation could pave the way for lower borrowing costs, while missteps could undermine confidence.