In February the ONS published the GDP figures for December 2020 which showed a 1.2% growth in the month as the result of a partial lifting of lockdown restrictions. While this meant that a double dip recession was narrowly avoided the GDP for the year fell by a record 9.9% for the year.
Construction grew in the 4th Quarter despite a dip in December and output remains below 4th Quarter 2019 levels. The fall in December stopped seven consecutive months of growth in the sector and is now -3.4% below the February 2020 level.
Source - Office for national Statistics (ONS).
However other sectors have not fared as well with the dominate services sector -6.9% below and manufacturing also -3.4% lower than pre pandemic levels.
These figures weren’t as bad as forecast, as the looser restrictions that Lockdown 2 together with companies adapting their business models for the current climate had on ensuring some parts of the economic was kept moving. This has been aided by more of the world economy is not in lockdown potentially assisting international trade
Having enjoyed a few months of growth, it now looks like there will be a downturn. For the first quarter of 2021 the Bank of England has forecast another fall, maybe by as much as -4% in GDP before a recovery takes place due to the impact of lockdowns in November and January and the ending of the transition period with the EU.
For the construction sector to thrive we need the wider economy to be recovering and for economic factors to be conductive for this to occur. The outdoor nature of construction usually leads to poorer performance in the winter and the fall in GDP in November, albeit less than anticipated, brings with it the threat of a double dip recession.
What Is a Double Dip Recession?
The definition of a recession is two successive quarters of falling gross domestic product (GDP) are needed to qualify for a recession, a double dip involves two recessions, separated by a small gap.
The last time this happened was in 1975 at the tail of the recession lasting from 1973 – 75. This was brought about following the oil crisis, causing the “Three Day Week” as a result of feared oil shortages and numerous union disputes. The retail price index inflation reached 24.2%, the BCIS tender price was running at 4.8% having peaked at a staggering 30% in 1973 as a result of the OPEC Oil Embargo.
The recession in the early 1980’s was caused by a combination of interest rates, with a base rate reaching 15%, inflation was above 8% from 1978 to 1982 and a high Sterling exchange rate leading to mass unemployment. Membership of the Exchange Rate Mechanism kept interest rates artificially high and eventually the UK left this device to devalue sterling before reducing interest rates.
The next recession in 1991 was caused by high interest rates coupled with falling house prices leading to negative equity and followed the late 1980’s economic boom
The final recession, the “Great Recession of 2008 – 2013” was caused by the global banking system suffering a shortage of money as a result of US banks investment in “sub-prime mortgage loans”. These were sold on causing banks around the world to suffer liquidity loss. The shortage of funds led to a loss of consumer and business confidence meaning that bank loans dried up. Governments implemented austerity measures to preserve funds, GDP fell as a result and construction projects were either cancelled or postponed.
This recession differs from previous recessions in that no previous economic cycles have been interrupted by lockdowns. The recession was the result of the economy being forced into hibernation in order to save lives. The question is that how will the economy rebound, and will the recovery be sustained?
Lockdowns 2 & 3 have brought fresh restrictions, with construction has been encouraged to remain open and the lessons learnt from early 2020 have been implemented. Restrictions have been viewed as not as restrictive as Lockdown 1 as the government has attempted to walk a tricky line between complete closure and keeping the economy running.
The UK has been badly affected by the Covid-19 pandemic, returning one of the largest falls in GDP of developed countries and double that of Germany.
The effects of leaving the EU single market have been estimated to reduce the GDP by -4% in the long term, further hindering our recovery. This is caused by the loss of inward investment as the UK looks a less desirable base to trade from with the loss of access to the single market, for instance with relocation in financial sectors. The loss of frictionless trade may lead to a reduction of trade with our largest trading partner, and having fewer EU workers who were net contributors to the economy.
Across the whole economy around 4 million people are still furloughed, with increasing unemployment and company insolvencies. The government is faced with record peacetime debt levels, reduced private business investment and individual consumers feeling the need to save as precaution against future employment concerns and earning prospects. All these will contribute to a slowdown in growth impacting upon the construction sector.
However funding is still available, confidence while shaken and the future uncertain, remains and the economy whilst still unsteady is recovering. Record low interest rates are assisting the government and with inflation rates below 2% this provides a steady platform for our economic recovery.
As the economic reopens in accordance to the published plans of the Government growth will return. However there is uncertainty about the speed of the recovery and whether businesses and consumers adopt cautious or more normal spending and investment depending on their fears of rising unemployment and concerns with new waves of infection.
To encourage investment, the Government has announced the “Super Deduction” tax break which will be in operation for the next 2 years. Where companies invest in qualifying plant and machinery, they will be able to reduce their tax bill by 130%.
The announcement that extra money for apprenticeships should be welcome for the construction industry trying to fill the labour shortage.
The Bank of England is currently forecasting economic output to return to pre-pandemic level by 2022 whilst the National Institute of Economic & Social Research are more cautious with their forecast that GDP will not return to pre-pandemic level by the end of 2023.
The HIS/Markit Construction Survey rebounded swiftly in June 2020 and since then remained above 50 until January 2021. This is the critical level as 50 signals that the respondents believe that the market is expanding and below 50 that it is contracting.
- While overgrowth has slowed after the initial surge there has been a steady continuous recovery. IHS Markit economics director Tim Moore said, “now it is encouraging to see the recovery driven by new projects and stronger underlying demand,”
- There was a slowdown in new orders in January based on the new lockdown, this can be linked to the short-term uncertainty that the UK economy faces.
- With congestion at the ports, delivery times has increased to the longest period since May 2020.
- The recovery has been driven by residential, but it is anticipated that infrastructure projects will take the lead in 2021 with the surge in residential project slowing because of the wider economy cooling off
- Confidence has been aided by the resolution of our trading status with the EU and the beginning of a Covid-19 vaccine rollout.
Gross Domestic Product
The Bank of England predicts that the economy will suffer a -4% drop in GDP during the first quarter of 2021 before bouncing back strongly in the 2nd quarter as the economy restarts with a successful vaccine rollout. The economy will continue to grow at a steady rate for the rest of the year. It also appears that the introduction of negative interest rates is unlikely, a relief to lenders and pension funds looking to invest. The current prediction is that the UK GDP will not exceed pre pandemic levels until towards the end of 2023.
Inflation will increase throughout 2021 to 2024 as demand for labour and materials will outstrip supply. The recovery of the global economy this will cause increases in essential raw materials such as oil where demand has fallen. The Bank of England will intervene with base rate changes either to simulate the market by further reducing the historic low rates or to increase the base rate if the CPI threatens the 2% mark.
Since the Summer of 2020, redundancies and unemployment has begun to affect the UK economy with the retail and hospitality sectors losing more than other sectors. Once the economy begins to recover the unemployment rate traditionally falls slower.
In contrast the ONS reported that construction vacancies are above February 2020 levels. Whilst this initially seems a good thing, delve below the surface this reflects labour migration and the return or impending return of EU nationals as highlighted elsewhere and the lack of UK workers to fill these roles. In the long term will the industry be able to attract and train people to meet the output required.
2020 saw a squeeze on average earnings as a lack of confidence coupled with a rise in unemployment. Despite the predicted increase in unemployment during 2021 as government assistance and the furlough scheme are removed at some stage earnings will increase as the economy improves.