Middle East Conflict: What will the impact be on construction?

Escalating tensions in the Middle East have raised concerns across global energy and shipping markets, with potential knock-on effects for industries that rely heavily on stable supply chains and energy costs. While the situation continues to evolve, the disruption to key trade routes and energy markets is already prompting questions about how wider economic conditions could shift in the months ahead.

For the construction sector, the implications are unlikely to appear through immediate changes to building activity. Instead, the effects are more likely to emerge through movements in energy prices, supply chains and the wider macroeconomic environment that ultimately influence construction costs.

Sam Parkin, Senior Economist at BCIS, explores some of the potential effects for construction professionals and the indicators they should be monitoring.

Escalating tensions in the Middle East have once again highlighted how geopolitical events can influence the economic environment facing the construction sector. While events in the region remain fluid, the potential implications for construction are likely to arise through energy markets, supply chains and the wider economic outlook rather than through direct or immediate effects on building activity.

For construction professionals, the key issue is how they may feed through into the cost environment over time. Markets have responded to the latest developments, but current price movements suggest expectations of disruption rather than a prolonged global energy crisis.

The macroeconomic environment

Rising energy costs and potential supply disruptions will place upward pressure on inflation, either pushing it higher or preventing it from falling as quickly as expected. In turn, this will keep interest rates higher for longer, dampening consumer confidence and slowing wider economic activity.

Central banks, including the Bank of England, will be cautious about both tightening and easing monetary policy. If the conflict proves prolonged and inflation rises again, interest rates may need to remain elevated, as they did during the Russia–Ukraine energy shock, in order to bring inflation back under control. However, with unemployment rising and general economic performance low, the Bank of England will remain very cautious when raising interest rates.

On the assumption of a prolonged conflict, elevated energy costs will flow into various industries, particularly those that are energy-intensive. Additionally, elevated inflation could also lead to renewed pressure on wages, as workers seek to recover real income losses experienced during earlier inflationary spikes. Finally, with trade routes closed or limited, shipping costs will increase, which will then flow into markets accordingly.

Energy markets

Energy markets have reacted immediately to the latest developments. Although Iranian oil exports are heavily sanctioned by Western countries, a number of global markets still rely on Iranian supply. As a result, the conflict has effectively reduced available global oil supply.

The situation has been exacerbated by the effective closure of the Strait of Hormuz, a critical shipping route that carries roughly 20% of global oil supplies. While shipping routes can adjust, diversions typically increase transit times and transportation costs, placing upward pressure on both oil and gas prices.

European natural gas prices have already responded sharply. Gas prices settled 39% higher this week at €44.51 per megawatt-hour, the highest level in roughly a year. UK natural gas prices rose even further, increasing 45% to 113.79 pence per therm.

Despite these increases, prices remain well below the peaks reached during the early stages of the Russia–Ukraine conflict, when UK natural gas prices reached roughly 640 pence per therm. Previously, UK and Europe were reliant on Russian natural gas. Since then, European energy markets have diversified supply, increasing imports from Norway, the United States and Middle Eastern producers, which has helped to cushion the impact of disruptions.

Construction input costs

Energy costs matter for construction because energy is embedded throughout the production and distribution of materials. Energy-intensive products such as iron, steel, cement, bricks, glass and aluminium are particularly sensitive to movements in fuel and electricity prices. Higher fuel costs also raise transport and logistics costs, increasing the delivered price of materials.

Construction plant and equipment are another exposure point. Diesel-powered machinery, generators and site transport all become more expensive to operate when fuel prices rise.

If elevated energy prices were sustained, they would likely place upward pressure on construction input costs across several parts of the supply chain. However, global energy markets also have mechanisms that help absorb short-term disruptions, including spare production capacity and strategic petroleum reserves.

There has been little available data to suggest an immediate reaction to the Middle Eastern conflict. However, one commodity, aluminium, has risen 1.7% to $3,194.50 on the LME. Aluminium is particularly exposed because the Middle East accounts for a significant share of global aluminium production, much of which is exported through the Strait of Hormuz. Other commodities may follow suit under the assumption of a prolonged conflict.

Shipping disruption and supply chain risk

Shipping routes are another key area to watch. The effective closure of the Strait of Hormuz has already restricted the movement of oil and energy products. However, the larger risk for global trade could involve disruption to the Suez Canal, one of the most important shipping routes between Asia and Europe.

During earlier phases of the Israel–Palestine conflict, vessels in the region faced attacks that forced shipping companies to reroute vessels around the Cape of Good Hope, significantly extending journey times.

Longer transit routes increase freight costs, insurance costs and delivery times, which are typically passed through the supply chain. For construction firms, this could lead to longer lead times for materials and higher procurement costs.

One mitigating factor is that global demand remains relatively subdued, which may limit the scale of price increases in shipping and materials markets.

Labour

It is still too early to determine whether the conflict will become prolonged. However, if elevated energy prices lead to rising and sustained inflation, labour costs will eventually follow. There is typically a lag between inflation and wage growth, as many wage agreements are negotiated annually. If inflation rises again, workers will likely seek higher pay settlements to offset real wage losses.

However, labour demand currently provides a counterbalance. Labour demand across the UK economy has softened, with the overall vacancy rate at around 2.3%. In construction, the rate is even lower, at 1.8%. This means that while inflation could push wage expectations higher, weaker labour demand may limit the pace of wage growth.

Overall, if inflation does rise again, construction wages are still likely to trend upward, though perhaps less sharply than during the previous inflationary surge.

What this means for construction cost planning

For quantity surveyors and commercial teams, the key issue is not necessarily an immediate shift in construction prices but the potential for greater volatility in the cost environment. Construction markets often respond to energy and commodity shocks with a lag, meaning sustained disruptions tend to matter more than short-lived price movements.

In practical terms, this reinforces the importance of monitoring leading indicators that may signal emerging cost pressures. Energy prices, commodity markets, shipping costs and supplier lead times can all provide early insight into potential changes in construction input costs.

From a project perspective, the current environment highlights the importance of robust risk management in cost planning and procurement strategies. Projects with long procurement timelines may require careful consideration of inflation allowances and contingencies. Contractors pricing work in uncertain conditions may also place greater emphasis on managing risk through tender validity periods or contractual mechanisms that address cost volatility.

While geopolitical events rarely translate directly into construction cost movement overnight, they can shape the economic and supply chain conditions that ultimately influence pricing and investment decisions. For construction professionals, maintaining visibility over these wider forces is an important part of developing realistic cost plans and managing risk in an uncertain market.

To keep up to date with the latest industry news and insights from BCIS register for our newsletter here.