Construction helps UK economy avoid a double-dip recession

CONSTRUCTION

• Lords Minister Susan Williams has suggested that the Government could be open to reviewing the current immigration policy for construction workers, but only after assessing how the UK labour market develops post-COVID-19 and how it responds to the new points-based immigration system. She said the Government’s shortage occupation list (or ‘SOL’), which currently includes civil engineers, mechanical engineers and architects, could be amended to include more construction roles (eg bricklayers, masons and plasterers). Shortages of talent could push up labour rates and have a detrimental impact on project costs.
• UK construction output fell for the first time in seven months in December 2020, with month-on-month growth rates falling across all sub-sectors. The latest figures by the ONS show that construction output in 2020 actually fell by 12.5% compared to the previous year – the largest annual drop of all four sub-sectors of the UK economy (services, production and agriculture). Despite the fall in output in December, construction grew by 4.6% in the final quarter of the year, helping the economy avoid a double-dip recession. In Q4 all sectors (other than private commercial) contributed positively to growth with the largest contribution coming from private new housing (which grew by 6.7% in Q4).

• The RIBA’s Future Trends survey indicated a slump in optimism about future workloads in January 2021. Concerns about Brexit and the third national lockdown sent its overall confidence index down to +3 last month from +10 in December 2020. According to the survey:
  • 25% of practices expect workloads to decrease in the coming months, while 28% expect workloads to increase
  • Just over half (51%) expect that workloads will hold steady
  • Worries centre on access to skilled staff, recruiting architects from outside the UK and availability of building materials
  • Sharpest fall in optimism from firms in northern England (with December’s score of +29 falling to 0 in January)
  • London achieved a score of +1 (the first time the score stayed in the black since February 2020)
  • Private housing was the only sector to return a positive score (+9)
  • Public and commercial sectors produced negative scores of -4 and -18 respectively
  • Large and medium-sized practices remained the most confident

• UK construction new orders failed to make a sustained recovery in Q4 2020, as the ‘All New Work’ index fell by 8.8% in the quarter. New order values in Q4 were around 17% lower than the five-year quarterly average. After months of optimism and signs of strong demand in Q3 2020, new order growth was dragged down by a 26% Q-on-Q fall in the final three-months of last year. However, things were more upbeat for private housebuilders who saw new work jump by nearly 6% compared to the previous quarter. The private industrial sector was another strong performer in Q4 2020, growing by more than 24%. The figures paint a strong picture of winners and losers on a sector-by-sector basis.

• A recent survey by Turner & Townsend has found that 45% of surveyed contractors reported an increase in the number of contractual disputes since the start of the pandemic. The majority of liability arising from COVID-19 events was believed to be held by the contractual employer rather than the supplier, highlighting a need for greater clarity over contract terms. The survey also found that one-third of respondents thought their contracts were unfit to address the effects of notifiable COVID-19 events, in part due to the interpretation of liability for unforeseen events and reliance upon force majeure clauses. Pausing of work, temporary site closures and reduced levels of productivity over the last year has exacerbated contract liability issues, prompting contracting parties to draft expressly worded contract terms.
• The RICS has said it will work urgently to ensure a new indemnity scheme for professionals signing off EWS1 fire safety assessments for cladding is rolled out quickly to increase the number of checks and relieve bottlenecks. The Government recently announced a state-backed scheme to target qualified professionals unable to obtain professional indemnity insurance (PII) for the completion of the EWS1 forms, saying it is aware that the difficulty in obtaining PII was a “major barrier” for professionals signing the forms. The RICS’ global building standards director Gary Strong said:

CONTRACTOR NEWS

• BAM reported a 16% slump in income from its building arm in 2020 to £777m, which made a pre-tax loss of £2.9m (compared to a £31m profit in 2019). However, the division bounced back in H2 2020 and made a £13m profit in the last six months of the year. Revenue from the firm’s UK civils arm outstripped that of its traditionally larger building business in 2020. Royal Bam, who singled out the UK as one of the countries where it would concentrate on growing its business, said its UK building business was facing a mixed outlook:

• Bouygues has reported that income from construction slipped 11% to £23bn in 2020 while its operating profit fell by 48%. Its construction operating margin fell to 1.7% in 2020 – down from the 3.1% margin it recorded in 2019. However, the firm noted that in the second half of 2020, its operating margin hit 5.7% as a result of a catch-up of activity in Q3 as lockdown measures were eased. Its operating margin was also bolstered by savings made and compensation received for sites being forced to shut because of lockdown in H1 2020.
• According to Glenigan clients handed out nearly £4.2bn of work in January – a decrease of almost £4bn from the previous month. The Department for Transport was the top-spending client (handing out two deals worth £252m), followed by the health department, which awarded 24 projects worth £185m. Most work was awarded in the private housing sector (23% of all work awarded) while the infrastructure sector was the next most prolific sector - accounting for 15.8% of the value of new work awarded.
• A procurement trends survey by Rider Levett Bucknall of over 113 main contractors has found that contractors are cutting the time they are prepared to honour fixed-price contracts as a result of rising input costs (notably material costs) and lead times. According to the survey the average fixed-price period being offered by contractors has shortened by five months since 2019 to just 16 months. It was noted that a client ‘push’ to ensure cost certainty and key quality criteria are defined is being accompanied by a contractor ‘pull’ seeking to de-risk tenders against a tightening market and to minimise resource input to bids.

MATERIALS & COMMODITIES

• Copper prices rose to their highest levels since 2011 on 19^th February 2021, reaching as high as $8,930/tonne in London. Investors are betting on an economic recovery from the pandemic and a rise in demand for commodities that will be needed to enable a global transition to green energy. Demand for copper is streaking ahead of constrained supply and production capacity in what analysts are calling a “supercycle”, fuelling prolonged price rises. Copper, which is used in wiring, is expected to benefit from greater demand for electricity in a shift away from fossil fuels. It’s an important component in renewable energy sources (eg wind farms) and electromobility for which demand is expected to grow.
• Prospects for supercycles in aluminium, nickel and oil are also realistic possibilities. Nickel prices recently rose to their highest level since September 2014 whilst aluminium prices hit their strongest levels since late 2018, at $2,162 a tonne. Price are expected to rise as the pandemic abates resulting in a disconnect between supply and demand. Analysts expect that global government stimulus spending will boost consumption of many materials and commodities.

UK ECONOMY

• UK consumer price inflation edged higher in January, from an annual rate of 0.6% in December to 0.7% in January 2021. Economists believe that inflation is likely to continue rising as surging oil prices are passed on to consumers, energy prices rise and temporary VAT cuts are reversed later on in the year. Some suggest January’s small rise will mark the first step towards above-target CPI inflation, which is likely to surpass the Government’s target rate of 2% by the autumn. However, other economists noted that upward pressure would be tempered by rising unemployment and slack in the economy. Janine Boshoff, macroeconomic economist at NIESR, said:

• Growth in UK manufacturing fell to a nine-month low in February. The flash IHS Markit/CIPS UK PMI for manufacturing activity fell to 50.5 – its lowest level since May 2020. It is believed that Brexit trade barriers hampered the sector’s export sales and its ability to secure raw materials and components from overseas. Respondents to the survey also commented on the difficulties of fulfilling orders to existing clients in the EU due to higher costs and transportation delays. Other factors mentioned by respondents included ongoing problems with shipping and strong global demand for raw materials. However, business expectations for the year ahead improved in the latest flash PMI survey, reflecting an anticipated economic rebound because of progress with the UK rollout of COVID-19 vaccines.
• The UK unemployment rate rose to 5.1% in the three months to December 2021 – a rise of 0.1% compared to the September to November 2020 period with the rate hitting a five-year high. The rise was in line with expectations as a surge in COVID-19 infections towards the end of the year stalled hiring plans. According to the ONS, around six million people are currently furloughed and there is a huge amount of uncertainty over what will happen to them when the Job Retention Scheme ends.

Global Economy

• China’s producer price index (PPI) – an index showing the price of goods leaving China’s factories – rose for the first time since the start of the coronavirus outbreak. Driven by rising costs for raw materials, China’s PPI rose 0.3% in January compared to one year earlier. Prior to January, the PPI had fallen year-on-year in every month since February 2020. The price data is an indication of the pace of activity in China’s industrial sector, which has been driving the global recovery. Domestic demand for certain products such as metal, cement and oil-based products has been driven by a boom in construction, contributing to higher prices. Exports have also helped drive China’s recovery, recording double digit growth over the past three months. The data points to increased price pressures in the coming quarters.
• In a recent meeting, leaders of G7 economies committed to delivering a green recovery from the pandemic. The conference fell on the same day as the US re-entered the Paris Climate Change agreement, with G7 leaders pledging to put their global ambitions on climate change and the reversal of biodiversity loss at the centre of their plans. Separately, the IMF has upgraded its global economic growth forecasts for 2021 and 2022 to 5.5% and 4.2% respectively. After a 3.5% fall in global GDP in 2020, the global upgrade reflects - in addition to vaccine developments - government spending measures announced towards the end of last year, especially in the United States and Japan.