Economics Panel: How much should we be preparing for economic growth in 2025?

‘In case you have been enticed to join us today by the prospect of growth in 2025, I am going to start with a caveat,’ warned Helen Castle, director of publishing and learning content at RIBA, chairing the latest RIBA economics panel. ‘Today’s discussion is centred on growth, but low growth for 2025, as very recent events are tempering optimism.’ Indeed – with the world still absorbing news of a Trump Presidency 2.0, and, in the UK specifically, a change of government and recent budget – economic sentiments include both caution and hope.

‘Certainly, the budget on 30 October delivered some positive news for architects,’ Castle continued, with promises from Chancellor Rachel Reeves of construction investment, more social housing and infrastructure, changes to the planning system, and investment in cladding remediation and energy-retrofit. Conversely, increased employer National Insurance Contributions (NICs), from 13.8% to 15%, will surely affect practices’ margins.

Bank of England forecasts

The Bank of England released its quarterly report less than a week before the webinar, and Lai Wah Co, deputy agent for Greater London at the Bank of England, discussed the decision to reduce the base rate by a further 0.25% since August (such that it currently sits at 4.75%) – ‘a welcome decision for everybody’, she observed.

‘We think that [the government’s approach to taxation and spending] will boost economic activity, meaning that economic growth will be a little bit stronger than prior to the budget, which is a positive thing’, she said. ‘We will likely continue with further gradual rate cuts,’ albeit subject to the economic environment.

But now for the caveat. The base rate cut has certain ‘knock-on effects’ including possible inflation increases. And ‘although inflation has come down a lot from the highs of the last few years, we are concerned about the pace of this, and that it stays low over the near term’. While headline CPI inflation has indeed fallen below the 2% target, a rise is predicted within six months tempering the good news. With any luck, this could be a ‘hiccup’, she said.

It’s also possible that future rate cuts will be paused, partly depending on whether certain areas, such as services inflation, prove to be ‘sticky’ and ‘tie the bank’s hands’. As Wah Co explained, services inflation shares a close relationship with wage inflation, given that services are domestically generated and labour intensive. However, survey respondents from the Bank of England Decision Makers Panel do anticipate lower rates of wage inflation in the next year, despite a recent ‘plateau’.

Wah Co said that at the Monetary Policy Committee ‘we think that UK GDP growth will average roughly 1% this calendar year 2024 and pick up to about 1.5% next year’, Wah Co concluded. ‘[That’s] an improving growth outlook, but these figures are relatively low by historic standards and not a particularly robust picture’.

For Adrian Malleson, RIBA head of economic research and analysis, the above signals good news for the sector, especially following the ‘rollercoaster’ few years during which practices have taken a beating from goods inflation, supply chain difficulties and client hesitancy. ‘Our hope is that the new government may provide some more stability and certainty,’ he said, and indeed it has signalled a ‘substantial increase in house building, with a 1.5 million target, although that's going to be challenging to achieve… as well as much needed investment in our public estate’.

Malleson drew on data from the RIBA Business Benchmarking Report 2024 and Future Trends surveys as well as insights from the Construction Products Association (CPA). According to Noble Francis at the CPA, that organisation’s data corroborates that 2024 has been difficult, with construction output having fallen, yet sees growth returning in 2025 and 2026.

Architects’ work generally precedes construction output, ‘so we can expect the benefits of growth in 2025 and 2026 to come a little sooner for the profession’, hoped Malleson. In support of the CPA’s predictions, the Construction Purchasing Managers’ index has also risen from -46 to+54. ‘In residential construction activity, the overall picture is one of higher levels of new business, and additional recruitment in the construction sector’.

RIBA’s latest survey data also shows that overall RIBA chartered practices increased revenue in the last year. However, growing profitability has been a challenge due to twin pressures of salary increases, practice costs, insurance costs and increased fee competition in the market. There is more positive news on the global stage with year-on-year growth reported in international revenue. ‘The UK maintains its position as a global hub of architecture and its position of contributing strongly to the UK's balance of payments,’ confirmed Malleson.

Historic overview and future trends

The last few years have certainly been a ‘wild ride’ he continued, but the RIBA’s data does clearly demonstrate an encouraging ‘consistent pattern of growth emerging over the last few months’.

According to Future Trends data, ‘the stand out message is that business conditions, after a very difficult time, are improving’. Practices are anticipating increasing staffing levels, with the RIBA trends workload index now at +3, ‘demonstrating growing optimism’.

Specific sector insight – private housing

News from the work sectors monitored in the latest survey is encouraging. Private housing, so important to smaller practices, was in the doldrums (at -23 points) last year, due to issues with planning which tended not to favour smaller projects, as well as clients unsure of whether they could afford home improvements. This is now changing.

As panellist Will Mawson, co-founder and director of Newcastle-based MawsonKerr Architects, observed: ‘This is a personal reflection, but what we've seen is a growing confidence… over the last 18 months, we'd seen a real flatlining of inquiries on our bread and butter, one off housing projects. But, since the election really, there seem to be quite a lot more inquiries coming through.’

Commercial projects

For commercial projects, the latest figure from Future Trends is +8 (having been -7), with certain niche areas doing particularly well, including data centres, student accommodation and sports venue projects. Office retrofits are another continuing area of growth.

Testifying to this was panellist Nicola Gillen, international partner and managing director, EMEA advisor at global real estate company Cushman Wakefield. ‘In the office sector we have broadly two client bases, investor developers on the supply side and occupiers on the demand side. From an occupier point of view, there's always a drive for cost savings but they are also really focused on employee wellbeing and engagement,’ she said.

The office is no longer ‘somewhere we all troop to every day by default... people have more choice than ever before, and the more virtual work becomes, the more important the role of physical place is in our communities, and our health, in binding us together. Occupiers are very focused on that.’ As a result, ‘architects that can focus on employee experience and how to accommodate a range of activities are the ones that will be busiest first’.

From the investor developer viewpoint, ‘those who have buildings or sites in prime locations are busy, as clients are looking for the best connected, highest quality, sustainability target-reaching designs that they can afford’.

Public sector

The public sector, which has for a long time showed a negative outlook, seems to be coming back very slowly, with confidence perhaps fuelled by the government’s acknowledgement of the urgency to make the public estate safe and fit for purpose, with remedial work and retrofit work. There is also an acknowledged need need for new facilities, including hospitals, GP surgeries, prisons, schools and universities.

Sustainability as a driver of growth

Two important points emerged on this topic. The first was from Gillen, on commercial projects: ‘Investor developers are [very concerned about] carbon reduction and social impact,’ she said. ‘Cushman Wakefield put out a report last year which shows that 76% of commercial buildings are at risk of obsolescence by 2030 if landlords don't act to improve their EPC ratings in line with the latest regulations.’ This means there is a ‘tsunami of work that's coming towards us’ to set this right.

For private residential, Mawson highlighted his practice’s sustainability expertise as a key USP in gaining and retaining work: ‘All of a sudden there is an appetite for sustainable buildings.’ 

Positive signs in sight

The interest rate drop seems to be working in inverse proportion to architects’ confidence. As Mawson summed up: ‘Conversations have defrosted over the last six months, which isn't necessarily leading to us open the champagne but there’s hope that these projects are moving forward. It’s not a rapid upturn,’ he explained, ‘but a steady understanding of what's happening ahead.’ As ever, the RIBA recommends joining the Business and Career Resilience Hub, with its wealth of resources designed to buoy practices during challenging times.

Ideas for resilience and areas of growth:

• Get ready for remedial work

Chancellor of the Exchequer Rachel Reeves revealed the government’s intent to invest in the planning system, cladding remediation and energy efficient retrofit, suggesting openings for architects in these areas.

• Sustainability pays

Clients have ‘a real agenda’ for sustainable building design, argues Will Mawson, but their budgets are constrained. Understanding sustainable construction puts architects at an advantage to help clients’ money go further.

• Make workplaces worthwhile

‘Physical still trumps virtual’ in many workplace settings, says Gillen. But employees are now focussed on their ‘carbon footprint, their wallets in terms of cost of commuting, and the wear and tear on themselves as individuals, particularly those in mid-career balancing other responsibilities’. Now, the role of workplaces is to ‘enrich the human experience’ and architects capable of delivering this will win work.

• Have awkward conversations early

‘Ideally not scaring clients off’, jokes Mawson but making sure that budgets and aspirations are understood and agreed with all parties early, is essential. If information comes later in the project and ‘shocks’ the client, it can completely destroy the relationship, and lead to project stop-starts.