background

Economic Outlook

UK Construction Intelligence Report

Overview

2020 will be another challenging year for the UK economy and especially the construction sector. The UK economy is expected to remain subdued with estimates for GDP growth of between 1-1.5%, which is the lowest for a decade. The main impact on our economy is the departure from the EU and the current uncertain trading status. The effects will start to impact in 2021 once we have completed the transition period and face new trading arrangements with our largest trading partner.

Global GDP dropped to 2.9% in 2019, although it is forecast to increase slightly to 3.3% in 2020 and while the threat of US-China trade wars has waned the threat of protectionism remains in the global economy.

The impact of the Coronavirus has become serious during February as it has begun to spread worldwide. The FTSE fell by 12% during February, suffering its worst weeks performance since 2008 and The Bank of England has reported that the UK is beginning to feel the impact with the possibility of downgrading growth forecasts as consumer spending and supply chains tightened.

Our forecasts in this document assume that the UK will complete the transition period in December 2020 with a trade agreement in place with the EU, but further negotiations ongoing.

The UK Departure from the EU

The December 2019 General Election returned a comprehensive majority for the Conservatives that enabled the departure log jam to be removed and the process of leaving the EU to be enacted. The EU Withdrawal Bill was passed on the 23rd January and the UK officially left the EU at the end of January 2020. The government has expressed that no extension to the transition period will be entertained. This will mean that a free trade agreement must be agreed within 10 months to enable ratification by the UK and EU governments. Some in the EU and many commenters believe it is a tall order for a comprehensive agreement to be place by this time.

The general election result has brought some confidence that the stasis we witnessed in 2018 and 2019 will end. The election result established a clear path for exiting the EU. This provides clarity for developers, many of whom have delayed projects for the last 18 months to proceed and begin their developments. An example of this confidence is the decision by M&G Real Estate to commence construction of 40 Leadenhall Street in the City of London following the previous developer halting the scheme as a result of the EU referendum.

The January figure of the PMI reflects this increase in confidence with a leap from the December figure of 48.5 to 52.4, well above the expected 50.6. In relation to construction activity, it fell at its slowest rate for eight months in January, according to the latest IHS Markit/CIPS PMI construction survey, with Barbour reporting a 18.5% increase in construction awards in January'20 compared to December'19. The UK construction total activity index remained below the no change 50 score last month to register 48.4, having been 44.4 in December.

The GDP figures released by the ONS for the 4th Quarter 2019 showed 0% growth, within this construction was a bright light as output increased by 0.5%. The overall GDP growth for 2019 was 1.4% which was the 3rd fastest growing economy in the G7 performing better than Germany and France and lagging only behind the US and Canada.

However, any increased confidence may be countered with continued uncertainty regarding future trading agreements causing subdued confidence with the possibility of labour and material costs rising.

image

The Bank of England Monetary Policy Report issued prior to the election in November 2019 suggested that the withdrawal agreement will increase household confidence. Further evidence is provided by Tim Moore, IHS Markit’s economics associate director, reported in their December report, that business optimism had recovered to reach its strongest level in nine months. “Survey respondents cited confidence that a more predictable domestic political landscape and clarity on Brexit could deliver a much-needed boost to clients’ willingness to spend in 2020,”. In January Nationwide reported that house prices had risen by 1.9% in a year, the largest increase in 14 months.

In the event of a satisfactory free trade agreement being agreed with the EU and subsequently rolled out to non-EU countries we anticipate that there will be an increase in confidence leading to more demand and subsequently the ability for the contractors to pass on the cost of increased imports and labour costs to the client leading to a slight increase in tender prices.

While the EU & UK have stated they are to prioritise an economic trading agreement for the December deadline, there is still residual uncertainty about the effects of leaving the EU without a trading agreement. The general belief among economists is that an orderly adoption of WTO rules will have an impact of at least -5% reduction in the short term with the major effect occurring in 2022 and a long-term reduction of -3% in the UK GDP.

Without an agreement there will be an impact on prices as WTO tariffs are adopted. While the tariffs on most products are not significant, they will impact on costs and the tariffs vary between sectors. Delays for custom checks will drive costs up for consumers and manufacturers. There are fears that this will lead the UK into a recession and the subsequent loss of investment and jobs.


Global Growth Forecast

The UK and global economies continued to stumble with global growth falling from 3.6% in 2018 to 2.9% in 2019. The IMF forecast for 2020 is slightly improved at 3.3%. The rest of 2020 will see the UK and European economies facing uncertainty amid the finalisation of any trade agreements.

Campaigning for the next US election has begun in earnest in 2020. American forecasts are predicting a Trump victory with a Democrat presidency victory considered a surprise. In the event of one of the more radical candidates such as Elizabeth Warren or Bernie Saunders winning, their threats to introduce tougher regulations for some sectors may affect growth in the US economy.

The Chinese economy has seen a continued slowdown in its GDP growth in the last few years. As a result, the government attempted to boost its economy in January by enabling banks to carry less capital and encourage more borrowing. The impact of the coronavirus to China and for worldwide trade together with the presence of continued protests in Hong Kong brings uncertainty to this market.

Gross Economic Growth

The IMF are not forecasting acute increases in prices as they see a gentler upward growth in the global economy rather than the large GDP increases experienced in many markets in the last upward cycle.


Inflation

During 2019 the CPI fell below the 2% inflation target of the Bank of England. As a result the Bank of England may look to cut interest rates to boost the economy. At the same time, it may wait to see whether salaries outstrip inflation, and how improving post-election confidence will impact the economy.

Inflation

Interest Rates - HM Treasury ‘Forecasts for the UK Economy’ Comparison of Independent Forecasts Dec 19

House Prices – CBRE House Price Forecast https://www.cbreresidential.com/uk/en-GB/content/five-year-forecasts


Exchange Rates

Exchange rates are forecast to remain volatile as the markets will react to Brexit delays and the result of trade agreements as they seek the safest markets. This will have an impact on overseas investment into the UK. This will impact on building materials that are currently including cladding, curtain walling and MEP.

Exchange Rates

Source – Experian UK Construction Forecast Winter 2019/20