Infrastructure will be the major driver of growth in 2022

Construction

• According to the CPA’s Winter Edition of its Construction Industry Forecasts for 2022-2023, construction output will rise by 4.3% in 2022, followed by 2.5% in 2023. Demand is strong in several sectors but the continued impacts of supply chain constraints as well as general inflation could dent private construction demand. Supported by a strong five-year spending plan, infrastructure will be the major driver of growth, but housebuilding will also be buoyant according to the CPA. The CPA noted that supply issues have eased off over the past six months but explained that questions over the availability of materials, products, labour, HGV drivers and imports will challenge growth. According to Noble Francis, smaller specialist sub-contractors will feel these pressures more acutely:

• RIBA’s latest Future Trends report suggests that with full pipelines of work and healthy levels of new enquiries, architects’ prospects for 2022 are strong. RIBA’s Future Trends Workload index returned a positive balance of +18 – a five point increase on November’s figure of +13. On balance, practices are optimistic about future workloads despite ongoing challenges around the availability and cost of construction products, a shortage of skilled tradespeople, planning delays, rising PII costs, a looming cost of living crisis that may dampen domestic demand and risks to the macro-economy from weak growth and rising inflation. Some architects even noted that 2021 was among their busiest years, with enquiries having to be turned away.

• COP26 president Alok Sharma has said that further investment in renewable energy schemes is the solution to the current global supply crisis. Building more domestic offshore wind and nuclear schemes will help keep down soaring energy prices, saying there was a clear “economic case” to build out these sectors. He added that these sectors were the answer to “cutting emissions, keeping bills under control and ensuring security of supply”. His comments follow the announcement of a regional competition by Rolls Royce to be the location for the main factory that will build a fleet of small nuclear reactors. These SMRs will then be installed at existing nuclear sites in the UK.
• UK construction output in November was the highest since September 2019 according to the latest ONS data. After several sluggish months of growth, output rose by 3.5% in November - the fastest monthly rise since March 2021. An easing of materials shortages helped produce a 5.7% jump in new work in November. General improvements in supply chain bottlenecks for construction materials have been widely reported, with the number of construction businesses reporting having to change suppliers or that were unable to source needed materials, goods or services dropping from 35% in October to 26% in November.

• According to new analysis from Glenigan, the value of project starts fell by 39% in Q4 compared to the previous quarter. However, detailed planning consents rose by 26% and main contract awards were up 13%, suggesting a solid pipeline of work for the coming months. Major planning approvals (for projects worth more than £100m) rose in Q4 (+46%) as did planning approvals for projects under £100m (+7%) compared to the previous quarter. Over the course of the entire year, Glenigan reported that the value of contract awards was up 7% compared to 2020. Commenting on the data, Glenigan economic director Allan Wilen said:

Client & Contractor News

• In a trading update ahead of its interim results, Kier announced that its net debt has been reduced from £436m to less than £200m. Meanwhile, Kier’s order book at the end of December was around £8bn – up from the £7.7bn it posted at its year-end in June 2021. The sale of its housing arm Kier Living, as well as an equity raise and ongoing cost savings, have enabled Kier to hack into its debt burden in recent months. Kier said that new contract awards were higher than the previous year, although it noted that order book growth was later than anticipated due to procurement delays. The business has been impacted by slower decision-making at local authority level caused by more council staff working from home because of COVID restrictions.
• Student and BTR housing specialist Watkin Jones have reported a doubling of its pre-tax profit (from £25.3m to £51.1m) for the year to 30^th September. The developer also said that turnover was up by 22% to £430m, reflecting “a strengthening of [the] institutional investor forward sales market”. The business also said its development pipeline had hit £1.8bn, 20% above that seen at the same time last year, with work progressing on 13 developments. Richard Simpson, chief executive officer of Watkin Jones, said the business was making strong headway with its new affordable homes business, founded on the group’s capital light investment model of pre-selling all schemes before construction.
• Citigroup, the US investment bank, has announced plans for a major refurbishment of its 42-storey tower in Canary Wharf. Budgeted at circa £100m, the building will be reconfigured for modern working patterns, with flexible and collaboration spaces. The renovations, which are expected to be completed in 2025, will help achieve a 20% reduction in electricity and water consumption and will provide impactful access to greenery, promoting biophilia. According to Yasmin Al Ani Spence, director at architectural firm WilkinsonEyre, lead designer of the refurbishment project, “…The internal layouts are anchored around a number of vertical villages, which break down the traditional floorplates and encourage inter-connection between levels, creating a stimulating and exciting place to work.”
• Winvic Construction has been appointed by Firethorn Trust to deliver more than 760,000 sq ft of industrial space on a brownfield site in Ellesmere Port. A single unit of 655,000 sq ft will make it the largest single cross-docked warehouse construction in the UK in 2022. Winvic will deliver the scheme to net zero carbon in construction, with future provisions for renewable energy supply. The design includes LED lighting to offices, photovoltaic arrays and 32 electric vehicle charging points, with ducting in place for an additional 32 spaces. Up to 25MV of power will also be available from a local carbon-neutral waste-to-energy plant.

Materials & Commodities

• The Baltic Exchange Dry Index – an index of average prices paid for the transport of dry bulk materials (eg coal and steel) across more than 20 routes – has fallen more than 76% from its peak on 7^th October 2021. The Index, despite jumping in the run up to Christmas, has now dropped back to February 2021 levels. The Index is now more in line with the 10-year average, indicating that the global supply chain crisis is abating and that goods are moving again. While supply chain constraints are not over yet and there are still backlogs and delays (eg shipments from Asia are taking 10 weeks when eight is normal), companies are evidently managing these issues better. The seasonal drop in demand for goods after the peak shipping season also helped push the Index lower in recent weeks.

• In a recent trading update, brickmaker Forterra confirmed that “significant double digit price selling increases” were delivered across key products in late 2021/January 2022. Prices have been hiked by more than 10% on key products and more increases are expected. The firm blamed escalating energy prices for the increase in costs to make its blocks bricks and blocks, indicating that it remains watchful of further inflationary pressures. It also said that full year brick sales volumes were 33% higher in 2022 than in 2020, and 1% higher than 2019 sales. Chief executive Stephen Harrison added:

The CLC’s latest Construction Products Availability Statement noted a gradual improvement in supply, helped by a seasonal reduction in demand. Most products have relatively good availability but as reported in previous statements, supply challenges continue to affect bricks and aircrete blocks, roof tiles, steel lintels, manhole covers, plastic drainage products and certain sealants, coatings and paints. Ongoing shortages in semiconductor components is constraining the availability of a number of advanced construction products (eg boilers, lighting and fire protection systems and air source head pumps). The statement said that the impact of Omicron had been limited but that rising energy costs feeding into price inflation continue to cause concern.

UK Economy

• The flash IHS Markit/Cips UK composite purchasing manager index, or PMI, a measure of the health of manufacturing and services activity, indicates UK economic activity growth slowed to an 11-month low in January. The index dipped slightly from 53.6 in December to 53.4 in January as coronavirus infections weighed down on consumer services. The flash PMI was lower than polled economists had expected and was in line with a small month-to-month fall in gross domestic product after an expected contraction in December. The PMI sub-index for input costs across the economy rose at its second-fastest pace since records began in 1998, after reaching a peak last November, reflecting higher energy costs and staff wages, according to the report. The BoE is therefore likely to hike interest rates again in order to contain price pressures.
• The cost-of-living crisis deepened in December as the UK’s headline inflation rate (the CPI) jumped to 5.4% - its highest rate in 30 years. With the widespread increase in the cost of most goods and services, BoE governor Andrew Bailey highlighted the dilemma of trying to raise interest rates to cool spending to bring inflation down, without squeezing household budgets too far and risk undermining the recovery. The tight labour market is a focal point at the moment, but the bank also noted that energy prices are now thought more likely to remain higher for longer.

Global Economy

• The IMF has warned of “multiple challenges” to the global economic recovery this year. In its latest set of forecasts, the fund has become more pessimistic about the scope for a full recovery from the pandemic. The IMF’s forecast for the global economy is for growth in gross domestic product to slow from 5.9% in 2021 to 4.4% this year, weakening further in 2023 to only 3.8%. The fund has knocked 0.5 percentage points off its growth forecast for 2022 and its deputy managing director, Gita Gopinath, explained that the world economy is having to deal with supply disruptions, higher inflation, record debt and uncertainty, describing the ongoing recovery as “like no other”. However, the IMF said the outlook could be even worse if central banks have to take firmer action to quell inflation or geopolitical tensions in Ukraine intensify.
• China plans to fight its economic slowdown by counting on revived infrastructure spending and expediating the rollout of 102 major infrastructure projects. China’s top economic planning agency announced that it will moderately front-load infrastructure investment on projects earmarked for its Five-Year Plan period (2021-2025). Infrastructure investment in China grew at a snail’s pace in 2021, rising by just 0.4% for the full year. However, strong infrastructure spending will put a floor under economic growth and support the wider real estate sector, which has been blighted by Evergrande’s near bankruptcy.