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Economic Outlook

UK Construction Intelligence Report

Overview

Covid-19 will mean that 2020 will go down in history as the pandemic has impacted on the social and economic life, ravaged the UK economy producing an unprecedented drop in GDP far exceeding the “Great Recession” of 2008-10. In the previous report we allowed a paragraph stating that the UK is beginning to feel the impact with possible downgrading of forecasts as consumer spending and supply chains tightened.

Since then the pandemic arrived on our shores and required a total lockdown to counter this virus. This has had a great effect on the whole economy, and we shall look at its impact on socio, macro and construction industry related levels.

Additionally we are still leaving the EU and this report assumes that there will be no extension of the transition period and that no significant trade agreements (i.e. a hard Brexit) with the EU will be in place. While in normal times this would have a significant impact on the economy at this moment in time it will be inconsequential when compared to the effect of the pandemic.

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Effects of Covid-19

Following the introduction of the lockdown Construction output fell by 40.1% overall in April 2020. This represents the largest monthly fall on record since the monthly records began in January 2010. New work saw a drop of 41.2% with the private new housing and private commercial sectors feeling the worst effects with output falling by 59.2% and 39.7% respectively.

GDP fell by 35% during the second quarter, before rebounding slightly back as people return to work and the lockdown began to be relaxed. June saw a stronger than expected growth of 8.7% which followed the disappointing May rebound of 2.4% growth as the economy preformed a lot weaker than the anticipated 5.5% growth. This represents a GDP of 17.1% below that recorded in January 2020

Exchange Rates

Source – ONS

Forecasts for the remainder of the year are for the UK GDP to be between -5% and -15% lower than at the start of the year. The Treasury predict an 8% fall in GDP, while the Organisation for Economic Cooperation & Development predict a decline of -11.5% or -14% if we have a second wave. Putting this into perspective the great recession of 2008 – 10 saw GDP drop by around -6% in total.

According to the latest CIPS/IHS Markit update there is confidence in the construction section, at least in the short term. The UK Construction Total Activity Index which shows the confidence in July was 58.1, having jumped to 55.3 in June 2020, up from 28.9 in May, to give its highest rating in 5 years. The phased restart of work on site has helped to lift output volumes and boost business confidence. At the same time, new orders stabilised after three months of sharp declines and purchasing activity expanded at the fastest rate since December 2015.

Exchange Rates

The rebound is based on the nadir of April, while significant is still well below pre- lockdown levels there is little doubt that it will have an impact on the industry for the next 3 -5 years and will require continued effort and joint working by the government and industry. The major concern for the industry is the amount of new work in the pipeline. While the industry shows optimism, at least in the short term, the recovery depends on how many of the proposed pre-covid projects come to fruition and start on site.


Recovery

Initial expectations were for a swift “V” shaped recovery where once Covid-19 had been contained and the country was able to return to usual in less than 6 months, then normal activity would resume, and the economy see a swift rebound. The delayed “V” shape replaced this where the economy bounces takes slightly longer but still bounces back strongly and the attempts to stabilise the economy prove largely successful. Some firms will end up insolvent and there will be some credit tightening with some long-term effects to the economy.

The “U” shaped scenario is based on the pandemic lasting between 12 – 18 months before a full vaccination is employed. This will see tighter credit conditions being introduced leading to a hit to investment, the housing market and consumer expenditure. The possibility of further falls in sterling (especially coupled with a hard Brexit) will see return to the levels of household austerity witnessed after the 2008 downturn.

The final option of a “L” shaped, (possibly a “W” with partial recoveries and dips) is now gathering momentum as the most likely outcome with the Office for Budget Responsibility (OBR) changing its initial optimistic “Delayed V” assessment of economic recovery prospects to this path in Mid-July. This route sees a longer period before recovery, with forecasts of a recovery unlikely before 2024 and will be associated with greater business failures, a large increase in unemployment leading to reduced investment and a subdued housing market.


Global Growth Forecast

In the previous report we commented that the IMF forecast for 2020 was slightly improved at 3.3% with the UK and European economies facing uncertainty amid the finalisation of any trade agreements.

For the forecast published by the IMF in June 2020 the revised global growth is forecast at -4.9% with the pandemic having a greater impact than forecast in April. For 2021 global growth is forecast to be at 5.4%, however this is still about 6.5% lower than the January 2020 forecast. These figures are still tentative as many countries, particularly the developing countries, are experiencing high levels of infection and within the developed countries social distancing is still affecting output. Many variables remain including the possibility of a second wave in the autumn and the length it will take for an effective vaccine to become available.

Currently the IMF have published forecasts for 2020 and 2021

Exchange Rates

CPI Inflation

During 2019 the CPI fell below 2% and has continued to fall during the first half of the 2020 as a combination of Covid-19, falling oil prices and low food prices have driven the rate down to 0.7%. It is forecast to increase as the economy begins to recover and the possibility of tariffs on imported and exported goods.

Exchange Rates

Source – OBR, June 2020


Exchange Rates

Exchange rates will remain uncertain as the effects of the UK’s departure from the European Union will see the markets look to invest in the markets it sees has the safest. With the UK presently viewed as suffering worse than the EU during the pandemic this will also play on the markets as they look for economic growth to return.

Exchange Rates

Source – Experian