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Economic Overview

UK Construction Intelligence Report

Overview

The UK economic recovery has continued throughout 2021. By the summer it was reported UK business confidence had hit a four-year high, thanks to growing optimism about the post-Covid recovery, with the successful vaccine rollout, removal of lockdown restrictions and changes to self-isolation rules all contributing to greater optimism among firms. At the same time concerns about supply chain issues and staff shortages were highlighted as reasons which could constraint the economy.

The Bank of England in their latest quarterly report revised the 2021 GDP forecast down slightly to 7.7% from the May forecast of 8.0% with material and labour shortages contributing to this. This forecast included the economy shirking by around -1.5% in the first three months of 2021 during another lockdown which was significantly better than its previous prediction of a -4% plunge.

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UK growth rebounded in the second quarter, when GDP expanded by 4.8% as lockdown measures were relaxed. The latest monthly figures in September of an increase of 0.1% in GDP reflecting disappointing GDP growth and concern that the economy was running out of steam. This meant the economy was still 2.4% smaller than pre-pandemic.

Presently we are within a cycle where the rapid recovery has led to demand exceeding the ability to supply this growth. This phase should be addressed as constraints on the supply side are removed, as logistic problems are resolved, and the manufacture of processed goods increases. Simultaneously the pent-up consumer demand will wane, and a balance is restored.

This will lead to a short-term increase in inflation, with the Bank of England currently predicting a 4% peak later this year in the Consumer Price Inflation (CPI). This doesn’t reflect the challenge that the construction sector faces with large increase in output costs above those figures.

August saw a record number of job vacancies in the UK with 35,000 advertised vacancies in the construction sector alone. While wage increases are high with stories of workers leaving one site after being lured down the road for a wage increase are rife, this could either be the normalisation of the wages following many people receiving cuts last year or part of a longer trend where the workforce are able to use their leverage in a diminished labour market.

The construction sector has been one of the leading drivers in the UK economy, at one stage output being above pre-pandemic levels. The resources of resource shortages in July saw a steep drop off in output and contribution to the national GDP.

Trends

Source - Office for National Statistics (ONS).



Trends

Source - Office for National Statistics (ONS).

Logistic Chain Problems

Throughout this report the problem of materials supply will be repeated. To understand the problem we need to investigate the root problem.

The pandemic started in China, however the severe lockdown measures introduced by the Chinese government and compliance by the Chinese public seemed to have controlled the initial outbreak there and by April 2020 most Chinese factors were working at 80% capacity. This enabled the shipping carriers to restart the export of goods that were sitting around in the ports.

The lockdown brought with it a change in both needs and products. The priority became the need to produce and transport PPE kit, hand sanitiser etc. With the public facing lockdown and increased saving power usual spending patterns altered as consumer spending was on goods, brought mostly online, rather than on services such as holidays or eating out. This led to a consumer driven recovery via products rather than services and with it the need to use ocean freight to compensate for the reduction in air freight capacity.

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With the impact of Covid reaching Europe and the US later than China, it meant that the ports couldn’t unload the containers as quickly as normal and with no products to export to Asia it meant that shipping containers were left sitting around. It has been estimated that over 60% of containers were in the wrong place of the logistics chain leading to the bidding war for containers since autumn 2020 at reported rates of 4 times the usual rate, adding pressure on input prices.

Further outbreaks of Covid drastically impacted the supply chain. In May 2021 outbreak of Covid-19 in Guangdong province in southern China saw the region's ports working at a severely reduced capacity and ships diverted to other ports causing further delay and stretching the global supply chain even further. The knock-on effect was ships missed scheduled arrival times, and late ships were delayed further before berths became available.

Another factor is that the pandemic has affected locations at different times, with waves of Covid causing stop start recoveries as new lockdowns are announced. This has the effect of further displacing empty containers and causing trade pinch points.

The new trading agreement with the EU is still causing fiction with administration delays holding up imports and exports. The introduction of the requirement for full safety and security declarations on construction products have contributed to the delays. In turn this has created extra costs on imported goods together with uncertainty caused by the lengthening of the order time required for building materials.

On a national level within the UK, once the materials are unloaded there is a severe lack of haulage availability. It is estimated that there is a driver shortage of up to 100,000, as drivers have left the industry due to poor pay and conditions, a reduction of European drivers on our roads and drivers having to isolate due to Covid.

With Europe and North America now busy in ordering goods for Christmas the likelihood is that the shipping crises will not be resolved until 1Q2022 at the earliest.

Confidence Levels

In June 2021 the IHS Markit/CIPS UK Construction PMI Total Activity Index recorded a 24 year high of 66.3, this was followed by a drop in July to 58.7, this dropped even further in August to 55.2 as the long lead in times for materials and lack of labour contributed to the fall in confidence.

Exchange Rates

Source - HIS/ Markit Construction Confidence Survey.

Gross Domestic Product

UK and global GDP rose sharply in the 2nd Quarter 2021 as covid vaccination programmes and the lifting of lockdown requirements has boosted the recovery, with the dominant services sector in the UK benefitting from people being able to eat out and holiday.

The latest forecast by the Bank of England is for 7.7%, this is a large increase from the 4% increase that we included in the 1st quarter Construction Intelligence Report.

There has been a slight reduction in the forecast due to the impact of the shortage of materials and labour. The emergence of the “Delta” variant and the impact of a large number of people being asked to self-isolate (the so called “Pingdemic”) have contributed to this slight reduction.

Exchange Rates

Source - Office for National Statistics (ONS).

The previous forecast figures are shown in brackets.

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The Bank of England predicts that the recovery past pre-pandemic GDP will be reached in 2022, although the need for gradual tightening of fiscal policy will see growth return towards more normal rates from 2023 onwards.

Exchange Rates

Source - Office for National Statistics (ONS).

CPI Inflation

In September the Bank of England reported that CPI inflation rose to 3.2% in August, from 2.1% in July, a record monthly increase. This is a result of increasing global input cost pressures have been passed through to some consumer goods prices and, the reopening of the economy led to a pickup in consumer services and goods prices.

CPI inflation is projected to rise temporarily in the near term, to 4% by 4Q2021, owing largely to increases in energy and other goods prices, before falling back to close to the 2% target.

Exchange Rates

Unemployment

The government furlough scheme has proved a large success to date with projections of unemployment to be considerably lower than earlier forecasts. Pre-pandemic the unemployment rate was at 4% with the Bank of England now forecasting a peak of 4.7%, this is a far lower than the 12% originally forecast in the first wave and 6.9% being forecast in the 1st quarter.

With the end of the furlough scheme there are fears of greater unemployment as employers take the opportunity to either rationalise their work force or there isn’t sufficient demand for their goods.

The latest report from the ONS is that there is over 35,000 vacancies in the construction sector advertised. It is also estimated that there are over 100,000 construction workers expected to be still on the scheme at its proposed ending in September.

Exchange Rates