The Labour government’s repeated warnings about the state of the public finances have dampened any hope of a post-election bounce for the construction industry, Turner & Townsend Alinea has said.

The consultant’s latest London market report said the economy is expected to have lost momentum over the second half of this year despite expectations that falling interest rates, more stable material prices and an energised new government would lead to renewed confidence in the sector.

Labour cancelled the £2bn Stonehenge tunnel in July amid concerns about a £22bn ‘black hole’ in the public finances left by the previous Conservative government

Labour’s concerns around what it claims is a £22bn “black hole” in the public finances left by the previous Conservative government has led to major public projects being paused, including the £2bn Stonehenge tunnel.

This in turn led to hesitancy from investors waiting to see what the new government’s economic policy would be, the report said, warning that the pipeline of work is still “yet to meaningfully harden”.

Meanwhile, T&T Alinea said any optimism in the sector was being counterbalanced by “worrisome” high levels of core inflation, deepening tensions in the Middle East which could impact oil prices, volatility in some commodities including copper and the impact of Labour’s £24bn hike in employers’ national insurance contributions.

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The firm has maintained its tender price inflation in London for 2024 at 2%, increasing to 3% for 2025, the same forecast in its summer report.

It said there had been no “material change in the market” since the summer, with questions over public finances and higher interest rates enduring.

However, it highlighted stronger growth in the capital’s private industrial and commercial sectors and pointed to S&P’s recent PMI surveys, which have suggested an increasing amount of construction work is on the horizon.

The report added that it expects output to increase as sentiment improves, although this would depend on how much money the government decides to spend on construction and how much it encourages the rest of the economy.

Meanwhile, cost consultant Exigere said it expected more developments to come forward next year as confidence improves, but warned of the effect of the UK’s subdued GDP and the slow rate at which the Bank of England is expected to cut interest rates.

The firm put its tender price forecast at 2.5% this year and 3% next year, followed by a rise of 3.5% in 2026.