OBR forecast spotlights challenging near-term backdrop for construction

The Office for Budget Responsibility’s (OBR) latest economic and fiscal outlook highlights the challenging conditions facing the construction industry, with persistent inflationary pressures, elevated borrowing costs and weak economic growth putting further pressure on project viability and the purchasing power of investment budgets⁽¹⁾.

Published alongside the Autumn Budget, the report’s central forecast expects CPI inflation to reach a quarterly peak of 3.8% in early 2027, while real GDP growth will slow to 1% in 2027, a downward revision of around 0.5 percentage points from the March forecast.

The OBR has also revised up its interest rate assumptions. Its central economic forecast, which assesses the outlook for the wider UK economy, is based on a market-implied path for Bank Rate that rises to just over 4.25% by mid-2027 and exceeds 4.5% towards the end of the forecast period.

Both figures represent an upward revision since the March forecast and reflect a significant change in market expectations according to the OBR. Its previous forecast was finalised shortly before the outbreak of the current conflict in the Middle East, when market pricing anticipated two Bank Rate cuts by the end of 2026.

‘If current Bank Rate expectations materialise, higher borrowing costs could further undermine the commercial viability of construction projects, increase the cost of financing development and infrastructure investment, and influence decisions about whether and when projects proceed,’ said BCIS chief economist Dr David Crosthwaite.

‘The economic outlook therefore remains finely balanced and is closely tied to how the conflict in the Middle East evolves. The OBR notes that, when it finalised its latest forecast, oil and gas futures prices were close to the top of the range observed since the conflict began. In other words, we’ve not moved much beyond square one.

‘Continued volatility in global energy markets presents a significant risk to the outlook. If energy prices rise further and remain elevated for longer, inflation could increase, economic growth could weaken and financial conditions could tighten.

‘Conversely, if energy prices return to the lower levels assumed in the OBR’s March forecast, the OBR suggests inflation could fall more quickly, economic growth could strengthen in the near term and financial conditions could ease.

‘For construction, any recovery in project viability and activity would depend on how quickly these improvements feed through to construction costs, tender prices and the wider market.’

The OBR’s latest forecast also raises questions about how far public investment budgets will stretch. Although departmental capital spending is forecast to reach £141 billion by 2031–32, it is expected to be £1.4 billion lower over this period compared with the forecast in March. This is mainly due to policy change to redirect funding to the Defence Investment Plan and small changes to underspend judgements.

At the same time, the OBR estimates that departmental capital spending would need to be an average of £2 billion a year higher over the remaining years of the current Spending Review to restore its real-terms value to the level originally set out in 2025.

‘The OBR’s report crystallises the challenges facing both the government and the construction industry. Put simply, the cost environment underpinning investment plans has changed quite considerably over the course of this Parliament,’ Dr Crosthwaite added.

‘This reflects both shifting policy priorities, including the need to increase defence spending in response to evolving geopolitical threats, and a more challenging economic environment in which financing and delivering construction projects has become more expensive.

‘The government’s ambition to deliver is clear, but the longer projects take to get off the ground, the greater the risk of their overall costs rising. This is a familiar feature of construction economics, but the risk is particularly acute in the current environment.

‘Successive economic shocks have often pushed input costs to a higher base, meaning that even as inflation eases, costs do not necessarily return to previous levels. Further delays therefore risk eroding the purchasing power of investment budgets and reducing the amount of work that can ultimately be delivered.’

Among the most significant findings for construction is the OBR’s weaker outlook for housebuilding. In its central forecast, the OBR expects annual net additions to the UK housing stock to fall from around 230,000 in 2025–26 to 220,000 in 2026–27, before increasing to 260,000 in 2030–31. Overall, it has revised down its expectations for cumulative net additions to the housing stock by 190,000 over the forecast period since its March report.

The OBR maintains that the 2024 planning reforms will have a positive impact on housebuilding eventually. However, the downward revision reflects wider pressures on the construction sector, including weak demand, rising materials costs and the impact of other regulatory changes.

The report also acknowledges the cumulative impact of regulatory and fiscal changes outside the planning system over the past decade, particularly since 2019, which have increased the cost, complexity and timescales associated with housebuilding.

It also examines the potential cost of the government’s ambition to deliver the largest council housebuilding programme since the early 1980s. While the existing Social and Affordable Homes Programme is expected to deliver 180,000 new social homes between 2026 and 2036, the OBR estimates that returning council housebuilding to 1980s levels could require at least a further 22,000 homes a year.

With capital grants for new social rent homes ranging from approximately £150,000 to £200,000 depending on location, the OBR estimates that funding these additional homes could cost between £3 billion and £4 billion annually. This is an illustrative estimate rather than a forecast of government expenditure, but highlights the potential scale of investment required.

‘More than anything, the OBR’s report reinforces just how important reliable, independent, project and construction input cost data is in the early stages of planning. With uncertainty persisting around energy markets and the availability of public investment, understanding the underlying costs of different types of projects and work from the outset is crucial,’ Dr Crosthwaite added.

‘For example, access to relevant project cost data, adjusted to reflect current market conditions and location, can help stakeholders understand the factors that will shape their project’s cost profile, even before detailed design information is available. This can make a significant difference in their ability to identify and mitigate risks early.

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

^{(1) GOV.UK – Economic and fiscal outlook – October 2026 – here}