Middle East conflict: what do the latest developments mean for UK construction?

The US-Iran conflict has entered a new phase following the end of the ceasefire and the announcement of economic sanctions on Iran. BCIS senior economist Sam Parkin examines what continued uncertainty could mean for UK construction, including the outlook for demand, financing conditions and key materials costs.

Nearly six months into the US-Iran conflict, there is still little indication that an end is near. The 60-day ceasefire has expired and US President Donald Trump has signalled new pressure on the Iranian economy, including potential penalties for countries that continue to trade with Iran.

Details of the new measures are expected imminently, but the announcement has already unsettled energy markets. Brent crude rose above $93 per barrel on 20 August, its highest level in a month, before easing ahead of the sanctions.

For construction, this is likely to mean a continuation of current conditions: elevated general inflation, higher financing costs, softer demand and increased costs for plant and some energy-intensive materials.

Higher inflation has clouded the outlook

The consequences of events in the Middle East are still feeding through to key economic indicators. General inflation in the UK, as measured by the Consumer Prices Index (CPI), rose to 2.9% in July, marking the first increase in the annual rate since March and providing a more indicative picture of price pressures over the last six months⁽¹⁾.

The main driver was the 13% increase in Ofgem’s energy price cap. Looking forward, it’s likely July’s cap increase will create a base from which CPI can grow. Another potential cap increase in October could compound inflation with some reports suggesting an increase of up to 4% is possible.

In this context, Bank Rate could well be held at 3.75% at September’s vote, while the possibility of an increase cannot be ruled out. Construction businesses should prepare for higher interest rates and borrowing costs to be sustained, which may weaken spending power, project viability and new housing demand if mortgage rates remain elevated.

A gloomier near-term for growth and demand

Encouragingly, the UK economy has maintained some resilience in recent weeks, despite the geopolitical backdrop. Real gross domestic product (GDP), (GDP after inflation is accounted for) rose by 0.4% in the second quarter on 1Q2026, supported by a 0.3% increase in construction output.

However, the 0.1% monthly decline in construction output in June does suggest growth occurred at the start of the quarter, before the US-Iran conflict re-escalated.

Further, contractions in construction output at the tail end of 2025 position the quarterly movement in output as a recovery, rather than growth. The latest ONS data reinforce this with current construction output well below the level recorded in 2023.

Stronger demand for repair and maintenance is likely in the near term. This is particularly the case in the residential market. While higher interest rates and market uncertainty act as a headwind on new investment and therefore new housing, it can spur homeowners to improve or maintain existing properties. New housing will likely remain subdued until the second half of 2027 with investors delaying project starts until the conflict, and its impact on costs, stabilise or ease.

Industry sentiment surveys reflect this picture to some extent. The latest S&P Global UK Construction PMI recorded a further contraction in July, with activity declining across the housing, commercial and civil engineering sectors. However, the pace of contraction eased compared with June, while business optimism improved, with 38% of respondents expecting activity to expand over the next 12 months.

Much will depend on how developments between the US and Iran unfold in the coming weeks, but on the ground, some businesses appear more hopeful that pipelines could improve in the long term.

The latest on commodity prices

Several key commodities have continued to experience price pressure in recent weeks. Copper reached $14,850 per tonne on the London Metal Exchange (LME) on 17 August, driven by a combination of supply constraints and demand.

Chile, which accounts for around 22% of global mine output, recorded a 5.8% year-on-year reduction in copper production in 1Q2026, according to the Chilean Copper Commission. Other supply-side interruptions include the slow recovery of Indonesia’s Grasberg mine following operational disruption, as well as flooding at the Kamoa-Kakula mine in the Democratic Republic of the Congo.

China’s ban on sulfuric acid, an important input in copper ore extraction, has also maintained upward pressure on prices. Together, these factors are likely to keep prices elevated for copper-derived products such as tubes and pipes, independently of developments in the Middle East.

Longer-term demand is another consideration. Investment in electric vehicles, data centres and energy infrastructure is increasing competition for copper, meaning prices could remain sensitive to further supply disruption.

The US-Iran conflict has had a more direct effect on aluminium. Around 6-7% of global aluminium output passes through the Strait of Hormuz, exposing the market to shipping disruption in the region.

Aluminium stood at $3,272 per tonne on the LME on 17 August. This was below its recent peak of $3,854 per tonne but remained above the pre-conflict level of just over $3,000 per tonne. Further US economic measures against Iran could maintain pressure if they result in additional disruption to trade or shipping.

Zinc prices have also risen, reflecting low Western inventories, stronger demand and disruption to mine production. Although global mine output is expected to increase, available smelting capacity remains constrained in some regions, including Western Europe.

What this means for UK construction

For UK construction, the principal risk is increasingly a prolonged period of uneven cost and demand pressures rather than a single sharp price shock.

Further US measures against Iran could extend disruption to energy and commodity markets even without an intensification of the military conflict. Higher oil and gas prices can affect construction directly through fuel and plant operating costs and indirectly through the manufacture and transport of energy-intensive products. They can also contribute to wider inflationary and financing pressures.

At the same time, individual commodities are being affected by their own supply constraints and longer-term demand trends. Projects with greater exposure to non-ferrous metals, fuel-intensive operations or imported materials may therefore experience different or more pronounced cost pressures.

Demand is another area to watch. If general inflation remains above the Bank of England’s 2% target and borrowing costs remain elevated, financing conditions could continue to constrain some private sector development. Residential and commercial projects with limited financial headroom may be particularly sensitive, while repair and maintenance and publicly backed infrastructure could prove relatively more resilient.

For clients, contractors and consultants, the practical implication is the need to understand project-specific exposure alongside broader measures of construction inflation. Evidence on individual materials, energy exposure and financing conditions can all provide a stronger basis for assessing cost risk as the situation develops.

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^{(1) Office for National Statistics– Consumer price inflation, UK: July 2026  - here}