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(Updated – 26 June 2020)

UK Economic and Construction Update

Latest Information

1) Property transactions – There were 48,450 UK residential property transactions in May 2020 according to HMRC data published on 21 June. This is 16.0% higher than April 2020 but still 49.6% lower than May 2019. Looking at the longer-term context, UK residential property transactions in May 2020 were still 6.2% lower than at the lowest point in the financial crisis, which was January 2009. But, May's transactions do not fully reflect the state of housing demand due to social distancing restrictions affecting the housing market only starting to be eased on 13 May plus pent-up demand (pre-COVID-19 transactions in progress being put on hold). So, a 'new normal' level of transactions is only likely to be clear towards the end of the year as transactions, enacted after social distancing restrictions began to ease, go through combined with the impacts of rising unemployment as the furlough scheme finishes.

2) The latest Zoopla housing market report, published 24 June, indicates that demand (enquiries to an agent regarding a specific property) has fallen 8% over last two weeks from a high base but is still 40% higher than pre-COVID-19. New sales agreed lag demand and has returned to pre-COVID-19 levels, recovering most strongly in northern England - Leeds, Sheffield and Manchester whilst the recovery in sales has been weaker in Bristol, Newcastle and Cambridge. This may not be solely due to demand-side factors but also the supply of homes for sale.

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3) Construction Furloughs – UK construction firms reported between 18th and 31st May that 36.5% of their workforce was still furloughed according to the ONS. Even construction firms that had been operating for more than the last 2 weeks still had one-third of the workforce on furlough, with clear implications for their activity levels, whilst construction firms that restarted in the last 2 weeks or are intending to restart in the next two weeks had 58% and 73% of their workforce on furlough. These are likely to fall to one-third (like firms that have already been operating for more than 2 weeks). The key questions are how quickly will construction firms not intending to restart in the next two weeks turn the 96% of workforce that are on furlough into redundancies and, of the construction firms operating or intending to restart, what proportion of those on furlough will turn into redundancies as the Coronavirus Job Retention Scheme (furloughing) increasingly requires employers to contribute and then the scheme ends? It's worth noting that up to 31 May, 154,400 UK construction firms have furloughed 679,600 employees.

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4) Construction Site Working Hours – The UK government published draft guidance on 26 June of

its plan to introduce flexible construction site working hours. New legislation is being introduced swiftly to allow contractors to comply with social distancing requirements by allowing staggered starts and finishes. The bill is expected to pass through all legislative stages on 29 June, after which local authorities will get only 14 days to rule on extended working hours applications or the application will be deemed to have been passed. Local authorities have been told that they should not refuse applications to extend working hours until 9pm on weekdays without clear reasons and for sites without residential neighbours, 24-hour working may be allowed. Any extended working hours can remain in place until next April.

5) Scottish Construction Guidance – Revised Scottish Guidance published on 22 June states that

construction activity in Scotland has moved to Phase 3 of the Construction Scotland Restart Plan, in which construction sites in Scotland may operate where safe distancing can be maintained between workers.

Phase 0 – Planning Phase 1 – COVID-19 pre-start site preparation Phase 2 – Soft start (only where physical distancing can be maintained) Phase 3 – Steady state (only where physical distancing can be maintained) Phase 4 – Steady state (where physical distancing can be maintained and/or with PPE use) Phase 5 – Increasing density / productivity

Phases 4 and 5 cover the resumption of tasks requiring workers to operate within two metres of each other while wearing suitable PPE, followed by a full return to work with safeguards in place. Restrictions on property transactions will be lifted from 29 June.

6) Intu Administration – The UK commercial retail owner, which primarily focuses on shopping centres and employs 3,000 people, stated on 26 June that it will be looking to appoint administrators. The focus will be on the impact of COVID-19 and subsequent social distancing restrictions on in-store retail. However, it is worth noting that the CPA has highlighted that the shopping centre segment of the retail sector has been the worst performing over the last five years and, in particular, the travails of Intu. It is also worth noting that Intu’s share price peaked in December 2006 at 1,091.04 but at the time of writing (12.00 on 26 June) it had fallen to 1.87, a 99.8% fall.

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UK Economy The latest data for the UK economy from the ONS were published on 12 June showed that UK GDP fell by 20.4% in April 2020, following a fall of 5.8% in March 2020.

Services output fell by 19.0% in April 2020, unsurprisingly the largest contraction on record with falls across almost all sub-sectors. The largest contributions were in Wholesale retail and motor trades, Accommodation and food services as well as Education. Industrial production fell by a record 20.3% between in April 2020, with manufacturing providing the largest downward contribution, falling by a record 24.3% but there were also falls from mining and quarrying (12.2%), electricity and gas (9.5%) and water and waste (5.3%). Within the 24.3% fall in manufacturing in April, the largest falls were in transport equipment, which fell by 50.2%, with motor vehicles, trailers and semi-trailers falling by 90.3%. Construction output in April is discussed in the Construction section.

The latest ONS employment data, published on 16 June, has further information from the May claimant counts data and April labour market report. The claimant count rate rose to 7.8% from 6.3% in April, the highest since 1995 but considerably better than it would have been without government support.

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The claimant count data are published a month earlier than the main ONS labour market statistics and although it offers a more timely indicator of labour market performance, not everyone in the claimant count measure is actually unemployed. As part of its policy response to the pandemic, government expanded its entitlement support and many people that now register as ‘unemployed’ according to the claimant count measure may not actually be unemployed but instead on reduced hours and earnings and thus receiving some kind of income support.

Unemployment claims were 528,900 in May, below April’s increase of 1,032,700. They remain far above the largest pre-COVID-19 increase in February 2009. Employment edged slightly higher but the number of hours worked dropped by 7.8%. The number of job vacancies (the key measure of labour demand) fell to 476,000, the lowest since May 2012 whilst the redundancy rate remained unchanged at 3.9%.

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The Coronavirus Job Retention Scheme (CJRS) appears to be working well so far. Based on data up to 31 May, 8.7 million furloughed workers are being sustained/subsidised by government, equivalent to 24.2% of the pre-COVID-19 labour force. While the policy is softening the blow for workers that have fallen on hard times in all industries, some proportion of the furloughed workers will end up unemployed in time, especially in services such as retail and travel where demand may remain structurally lower long-term. However, the CJRS serves two important purposes. Firstly, it helps to contain the damage by limiting the short-term rise in unemployment as many furloughed workers return to their jobs in time. Secondly, it helps to spread out the cost of the rise in unemployment and gives more time to those workers also get more time to find an alternative job at current pay. The most recent data covering UK economic activity are the IHS Markit/CIPS Purchasing Managers Indices (PMI), which are timely surveys of monthly activity across UK Manufacturing, Services and Construction. The PMI for Services in May was published on 3 June and was 29.0 in May, up from 13.4 in April and indicated that the rate of decline in service sector output moderated from April's survey record, but was still faster than at any other time since the survey began in July 1996. Just over half of the survey panel (54%) reported a drop in business activity during May, while only 13% signalled an increase. Those indicating a decrease in output since April reported a severe lack of new business to replace work that had been completed after the lockdown, following cutbacks to corporate spending in response to the COVID-19 pandemic. There were some reports that the gradual reopening of the UK economy had a positive impact on client demand. Other service providers commented on a tentative revival in business conditions following the initial shock of the lockdown period. Lower volumes of new business were attributed to the cancellation of new projects, customer closures and constrained sales operations with staff placed on furlough. New export work also fell rapidly in May, despite sporadic reports of rising demand in the Asia-Pacific region and new online sales initiatives. Moreover, a number of service providers noted that they had ceased taking any new work from abroad due to severe restrictions on international travel. Mirroring the trend for business activity and new work, latest data highlighted that employment decreased at the second steepest rate since the survey began in July 1996. Anecdotal evidence frequently indicated that employees had been placed on furlough, while some reported redundancies amid an expected slump in customer demand over the long-term.

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The IHS Markit/CIPS UK Manufacturing PMI for May was published on 2 June and rose to 40.7 in May, up from a record low of 32.6 in April but it still signalled a marked deterioration in overall operating conditions. The headline index is at its seventh-lowest level ever and at depths unseen outside of the current pandemic and the global financial crisis of 2008-09. The impacts of the pandemic were felt across the manufacturing sector in May. Rates of contraction in output, new orders and new export business were among the steepest in the survey history across consumer, intermediate and investment goods producers alike. Pockets of growth were remained linked to healthcare-related or PPE products. Some firms noted inflows of new business showed signs of restarting as clients began the process of reopening and the lockdown restrictions implemented both in the UK and overseas are gradually easing.

UK Forecasts

At the time of writing, most macroeconomic forecasters still assume a ‘V’ shaped recession; a sharp fall in activity during Q2 whilst economic activity recovers in the second half of 2020. On 17 June, HM Treasury published recent UK GDP forecasts across City and non-City forecasters. The main forecasts are illustrated below in addition to the CPA’s main scenario. The Office for Budget Responsibility and Bank of England coronavirus scenarios are also included. Of the main forecasters, the average (median) estimate for Q2 GDP is -16.8%. Forecasts and scenarios range from the National Institute of Economic and Social Research forecast of -13.6%, the most optimistic estimate, to Office for Budget Responsibility’s pessimistic scenario of -35.1%, which suggests that one quarter of UK economic activity will be lost and appears too pessimistic given the GDP data for April. The most recent forecast is by the Ernst & Young ITEM Club, published on 15 June. It expects GDP to contract by 15% in Q2, a downward revision from the 13% anticipated in Spring and, overall in 2020, GDP will fall by 8%. It expects recovery from Q3 whilst fiscal and monetary stimulus will provide support and consumers will benefit from low inflation (CPI falling to 0.2% in the Summer) with pent-up demand following a collapse in consumer spending in Q2. Over half of the macroeconomic forecasts for Q2 GDP are between -15% and -17.5%. Overall for 2020, the most optimistic forecaster, HSBC, estimates UK GDP falling by 6.8% whilst the most pessimistic scenario, from the Bank of England, anticipates GDP falling by 14.0%. The average (median) fall in GDP in 2020 is 10.1% whilst almost half of the forecasters estimate UK GDP in 2020 falling by between 10% and 13%. In 2021, the most optimistic scenarios are by the Bank of England and OBR, which anticipate GDP growth of 15.0% and 17.9% respectively whilst the most pessimistic scenario, from Deutsche Bank only anticipates GDP growth of 3.0%. The average (median) rise in GDP in 2021 is 6.6% whilst over half of the forecasters estimate UK GDP in 2021 rising by between 5% and 7%.

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The CPA’s UK economic main scenario is based on the assumption of a ‘V-shaped’ or ‘tick-shaped’ recession with a sharp decline in March and Q2 but a slower recovery. It assumes social distancing restrictions begin to be eased gradually from May, to enable economic recovery to begin in June. The main scenario implies that GDP may endure a fall of 2.1% in Q1 and a further 15.1% fall in GDP during Q2. This is the most optimistic of the CPA’s scenarios. The easing of social distancing restrictions is likely to be gradual as government is initially likely to be risk averse so the third quarter of the year sees the start of recovery in areas of the economy that do not involve large gatherings of people or international travel. Recovery from the Q2 low base may be initially rapid in Q3 and early Q4, assisted by government stimulus, but is unlikely to be sufficient to offset the sharp falls in the first half of the year. Even the CPA’s most optimistic scenario, the main scenario, implies that UK GDP may fall by 10% in 2020 overall, a considerably larger decline than the 6% fall experienced during the financial crisis of 2008/09 and over a much shorter time period.

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Construction

ONS construction output published on 12 June reported that activity in April 2020 was 40.1% lower than in March and 44.0% lower than one year ago although it is highly likely to be an underestimate of the fall in activity given that the output is determined by a survey of contractors. As a result, there are likely to be issues in the response rate and survivor bias. The response rate fell from 66% in early 2019 to 46% in March and April and the fall in respondents is likely to be firms that had shut down temporarily so the firms responding largely reflect the firms where some activity was taking place.

Within the 40.1% fall April's construction output overall, the largest falls were in public housing (-67%), private housing (-59%) and private housing repair, maintenance & improvements (-54%) whilst the lowest falls were in public non-housing (-14%), which is primarily health and education, and infrastructure (-20%).

Private house building output in April 2020 was 59.2% lower than in March and 63.6% lower than a year ago although this is still likely to be considerably over optimistic because as it implies around 40% of private house building still continued & implies activity was higher than in the financial crisis despite most house builders announcing that they were shutting down after social distancing restrictions on 23 March.

The sharpest fall in public housing, which in April 2020 fell 66.5% compared with March and 66.1% compared with a year ago but, again, this is likely to be overoptimistic given the house building shutdown affecting most of the month.

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The third largest fall in activity was in the fourth largest construction sector, private housing rm&i, which in April fell 54.3% compared with March and was 61.8% lower than one year ago, unsurprising given households’ unwillingness to have contractors working in their home as well as SME concerns whether they could or should undertake activity during social distancing restrictions.

The least sharp falls in construction output were in public non-housing, primarily health and education, which in April 2020 fell by 'only' 14.0% compared with March and was 'only' 19.0% lower than a year ago due to construction work on hospitals for the COVID-19 assistance and work on schools whilst pupils were away partially offsetting sharp falls in other areas of the sector (prisons, defence etc.).

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The second least sharp falls in construction output were in infrastructure, the third largest construction sector). In April 2020, infrastructure output fell by 'only' 20.3% compared to March and was 'only' 20.7% lower than a year ago because social distancing and other safety measures are easier to enact on large infrastructure sites that are often more capital intensive (so fewer people) and have clients keen to carry on with activity (government and regulated firms).

The IHS Markit/CIPS UK Construction PMI published on 4 June was 28.9 in May compared to 8.2 in April. 50=no change so this is a considerably lower decline than April's unsurprising worst fall on record. The rise in the PMI in May compared to April was expected given the gradual reopening of some house building and construction sites to complete half-finished projects that had already started pre-COVID-19. The Housing PMI was 30.9 in May compared with the 7.3 initially reported in April, which reflects restarting developments that were primarily near to completion in May whilst house builders remain very cautious about starting new developments. The indications we have are activity on site in May was around 50-55% of the same time one year ago. Civil engineering activity also fell at a slower than in April and many sites reopened during May. Commercial was the worst affected sector in May. Whilst some sites reopened, it has been difficult reopening some sites especially in London given concerns of taking public transport to work and social distancing in tight spaces. The key concern, after an initial restart of work May-July finishing previously halted projects, will be where the demand will come from for new homes and commercial space given the "rapid drop in new orders" reported in May.

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According to data from the HMRC published on 11 June, 1.1 million UK firms have furloughed 8.7 million employees at a total cost to the government of £17.5 billion up to 31 May. 154,400 UK construction firms have furloughed 679,600 employees at a cost (so far) of £1,760 million up to 31 May. The latest number of job vacancies in construction, which is the key measure of labour demand, was also published on 16 June and fell to just 13,000 between March and May. This is the lowest since January to March 2013 but still substantially higher the nadir of only 9,000 during the financial crisis.

According to the ONS retail sales data published on 19 June, volumes partly rebounded in May 2020 with an increase of 12.0% when compared with the record falls experienced in the previous month, but sales were still down by 13.1% on February before the impact of the coronavirus (COVID-19) pandemic. Non-food stores provided the largest positive contribution to the monthly growth in May 2020, aided by a strong increase of 42.0% in household goods stores, with the opening of hardware, paints and glass stores reflected in this sector. The proportion spent online rose to the highest proportion on record in May 2020 at 33.4%, which compares with the 30.8% reported in April 2020. Given that household spending accounts for around 70% of UK GDP, this points towards a relatively sharp initial stage of recovery (after the 25% fall in GDP in March and April) in line with the CPA main scenario for UK GDP.

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Construction activity has historically had a strong correlation with economic growth but tended to be three times more volatile. As a result, a 10% fall in UK GDP during 2020 would generally imply a fall of 30% in construction output.

However, this contraction has been different to past recessions in that activity declined at a quicker rate and is expected to last for a shorter time whilst the greatest impacts are in sectors that have not stopped due to restrictions such as services whilst construction has been allowed to continue. Even where construction activity is continuing or restarting, productivity has fallen.

The indications CPA has from contractors is that on site productivity where SOP are adhered to has fallen by 30%-40% depending on the development but as SOP are recent, contractors may adjust to the SOP and reduce this productivity deficit.

The key issue for construction is 86% of employment is in SMEs and 41% is self-employment so the majority of business models are based almost entirely on cash flow and few assets. This means a sharp fall in demand would lead to a sharp rise in unemployment, administrations and liquidations, particularly following on from the slowdown in construction activity at the end of 2019.

The negative impacts of both declining activity and delayed payments on the activity since 23 March is likely to be felt by SMEs primarily in June and July. In addition, there are also concerns that, as in previous recessions, an increase in administrations and insolvencies may lead to difficulties in trade-credit insurance, meaning that firms would have to pay suppliers up front, leading to further cash flow issues for SMEs.

In spite of the Government’s loan schemes, lending to construction SMEs was £423 million in April, 16% lower than in March and 26% lower than one year earlier according to Bank of England data. This suggests that either SMEs did not need the additional finance as they were not undertaking projects or that lenders reduced lending to construction SMEs and also used the government backed lending schemes such as the Coronavirus Business Interruption Loans scheme at the expense of general lending, which is where lenders are more exposed. It is also worth noting lending to construction SMEs appears to have been on a gradual downward trend over the last two years.

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On 18 June, the ONS published the latest results of its timely survey into the impacts of COVID-19 on businesses across all sectors in the two weeks to 31 May. 454 construction firms responded to the survey of which 85% were construction SMEs.

38% of construction firms reported their cash reserves would last three months or fewer (‘no cash reserves’, ‘less than 1 month’ and ‘1 to 3 months’ together) compared with 26% in manufacturing and 29% across all industries. It is worth noting that 19% of construction firms also reported that they were not sure how long their reserves would last.

The ONS also reported that in the two weeks to 31 May, 47% of staff in construction firms were on furlough (compared with 29% in manufacturing and 38% across all industries) whilst 33% were working as per normal and 16% were working remotely.