Autumn 2021 UK Market Report
Wider context
Latest data from the ONS estimates that GDP rose by 0.4 percent in August, following a revised 0.1 percent fall in July. The easing of COVID-19 restrictions prompted increased leisure spending and domestic holidays whilst international travel restrictions largely remained in place.
GDP remains 0.8 percent below its pre-pandemic level and there is concern from some that the challenges with labour availability, skills shortages and materials issues will dampen economic recovery. However, the government remains optimistic that the economy will return to pre-pandemic proportions by the beginning of 2022.
Recent forecasts from the Office for Budget Responsibility (OBR) indicate that the economy will grow by 6.5 percent this year. This is a revision from its March forecast which predicted growth of 4 percent this year, after 2020 experienced the worst recession in 300 years, reducing GDP by 9.9 percent. The OBR also revised its estimate of long-term scarring for the economy from 3 percent to 2 percent.
Employment and labour shortages
Latest data on the labour market from ONS shows another monthly increase in the number of payroll employees in September 2021, and that this figure has returned to pre-pandemic levels (February 2020).
During the pandemic, employment rates decreased and the rate of unemployment increased. However, both are showing signs of recovery. Estimates for June to August 2021 show the employment rate increased to 75.3 percent and the unemployment rate decreased to 4.5 percent.
The number of job vacancies in July to September 2021 was a record high of 1,102,000, an increase of 318,000 from its pre-pandemic (January to March 2020) level; this was the second consecutive month that the three-month average has risen over one million. All industry sectors were above or equal to their January to March 2020 pre-pandemic levels.
The OBR anticipates the unemployment rate peaking at 5.2 percent at the end of 2021, much reduced from its previous estimates due to the extension of the furlough scheme.
Shortages
There are widespread shortages of goods and materials impacting the UK construction industry (see materials section for more detail). However, some of the drivers are also applicable to other industries and geographies. For example, the global microchip shortage is impacting the car manufacturing industry, which has led to a series of shutdowns across various automakers.
General Motors paused its production at eight of its 15 North American assembly plants in September and Toyota reduced its production by at least 40 percent in Japan and North America, resulting in a cut in production of 360,000 vehicles worldwide in September alone.
The factors behind the microchip shortages include:
- Increased demand for computers/electronic devices during lockdowns
- Natural disasters have impacted production, including winter storms in Texas and a drought in Taiwan
- Labour shortages
- COVID-19 outbreaks
- Reduced demand during the pandemic had seen orders cancelled.
The UK supply of microchips is improving, with a 6.6 percent increase in the manufacture of motor vehicles in the month to August 2021. Output in the manufacture of motor vehicles remains 14.5 percent below its February 2021 peak, while sales and repairs of motor vehicles have increased close to pre-pandemic levels.
Delivery issues
Delivery issues have been widely reported, with heavy goods vehicle (HGV) driver shortages impacting the availability of many products and disrupting food and fuel supplies.
The Road Haulage Association (RHA) has said that 100,000 drivers are needed to meet demand and that there could be ongoing disruption in the lead up to Christmas.
There is a combination of factors behind the shortages:
- According to Logistics UK, the pandemic has reduced driver training and testing with 43 percent less tests conducted in 2020 compared with 2019
- The RHA says that the average age of an HGV driver is 55 with many drivers retiring, while less than one percent of drivers are under the age of 25
- Brexit is said to have played a part, with drivers facing increased paperwork and some departing for their home countries during the pandemic and not returning afterwards
- Changes to off-payroll working (IR35) implemented from April 2021 impacting on the labour market. With medium and large sized private sector companies now responsible for judging a contractor’s IR35 status rather than the contractor themselves, there is a reduction in agency labour. Cost increases for tax and National Insurance contributions mean that drivers need to be paid more to achieve the same standard of living
- Training is expensive which is seen as a barrier to attracting new entrants, as well as less attractive pay and working conditions than other sectors.
Alongside the HGV driver shortage, there are ongoing shipping issues. The availability of freight containers has reduced due to pressure on global supply chains during lockdowns, plus pent-up demand as economies recover from the pandemic.
This scarcity of containers has meant prices have risen, with CNN reporting that data from Drewry indicates cost increases of more than 600 percent during 2021. A year ago, companies would pay roughly $1,920 for a 40-foot steel container on a standard route between China and Europe, now the same container is costing more than $14,000.
As a result of these higher prices, some containers are getting stuck in circulation or heading back to Asia empty, due to the low-value of typical cargo such as waste paper and scrap metal. Rising raw material costs have impacted container production, with port restrictions and COVID-19 outbreaks exacerbating issues. Many commentators do not expect improvements until February 2022, Chinese New Year at the earliest.
Rising energy prices
Wholesale gas prices have increased by over 250 percent since January 2021 due to a cold winter in Europe reducing the amount of gas stored. Russian supplier Gazprom told Reuters in September that Europe’s gas in storage is currently 22.9 billion cubic metres (bcm) below normal levels. Supplies have also been impacted by a surge in global demand.
Gas prices are rising across Europe, with a BBC article identifying reasons for the UK being particularly impacted as:
- The UK being reliant on natural gas; used to generate a third of electricity and 85 percent of homes using gas central heating
- Supplies of renewable energy have reduced due to lower levels of wind; this summer was the least windy summer since 1961
- A fire at the Sellindge National Grid site in Kent closed a power cable supplying electricity from France.
This is causing huge pressure for retail energy suppliers, with some collapsing, unable to meet increased gas costs nor pass these costs on to customers. The next review on the energy price cap, which sets the maximum price for domestic customers on a standard or default tariff in England, Wales and Scotland, is due in April where it is expected to significantly increase.
Surging energy prices are impacting industry and businesses, particularly those of energy-intensive industries such as steel and ceramics, where production is being paused or reduced. Additionally, these manufacturers are warning of electricity cost spikes impacting production, with an “on off” approach damaging furnaces, reducing efficiency of plants and increasing emissions.
There is concern within the industry that a lack of government support will impact competitiveness, with the director of UK Steel, Gareth Stace, telling The Guardian that energy costs in the UK were triple that of rivals in Germany. Labour shortages and issues with shipping and deliveries are also having an impact.
Increased costs are anticipated due to energy price increases. British Steel have recently announced an energy surcharge.
Threat of further tax increases/reduced government investment
Latest data from the ONS demonstrates the huge impact which COVID-19 has had on the economy and on public sector borrowing and debt. Combined central government tax and National Insurance receipts for the financial year ending 2021 were £32 billion (4.5 percent) less than a year earlier. Government support for individuals and businesses during the pandemic led to a £204.4 billion (27.7 percent) increase in government day-to-day (or current) spending.
As a result of low receipts and high expenditure, provisional estimates indicate that in the financial year ending 2021, the public sector borrowed £319.9 billion. This is equivalent to 14.9 percent of GDP, the highest ratio since the end of World War Two, when it was 15.2 percent in the financial year ending 1946.
Borrowing estimates following the pandemic have reduced compared to March forecasts. However, the Treasury has stressed the need for sustainable public finances as the heightened sensitivity of debts mean that a 1 percentage point rise in inflation and interest rates could add £23 billion to the government’s debt interest bill.
As well as recovery from the COVID-19 pandemic, there are other challenges which will require public spending. These include costs associated with an ageing society, balancing inequalities arisen from the pandemic/levelling up and meeting other challenges such as the transition to net zero.
In his budget speech, Rishi Sunak said that his 'goal is to reduce taxes', to be achieved before the next election which will be held by May 2024. The OBR has said that this will need to come from reductions in public spending or from extra borrowing.
There are also concerns that a central forecast of a peak of 4.4 percent inflation next year could prove to be optimistic if energy and food costs continue to rise.
Political landscape/Brexit
A recent report by the Dublin Port Company has shown that freight traffic from Great Britain to Dublin Port has dropped by 21 percent since Brexit, whilst business with the EU is up by 36 percent. Dublin Port said it had also experienced a “dislocation” of traffic coming into the republic via Northern Ireland. At the time of writing, the Northern Ireland Protocol is the subject of talks.
Data from ONS shows that employment in the construction sector fell from 2.3 million in 2017 to 2.1 million at the end of 2020, with a four percent fall in UK born workers and 42 percent fall in EU workers. This reduction is particularly significant in London, with a 54 percent fall in EU workers. This reduction will increase the labour pressures being felt by the industry.
The plan to replace CE markings with the UK Conformity Assessed (UKCA) mark has been pushed back to 1 January 2023.
COVID-19 and rising cases
COVID-19 cases sharply reduced at the end of July, but the average number of daily confirmed cases has been climbing since the end of September, and on 21 October reached more than 50,000 for the first time since 17 July. Since then, cases have steadied to circa 40,000 per day.
Whilst vaccinations have reduced the level of hospitalisations and deaths, there is concern that the NHS is facing pressure once again, particularly due to staff burnout and a backlog caused by the pandemic, as the case numbers start to rise.
Plan A of the government plan for the pandemic is currently in place in England, involving booster vaccines and offering of a single vaccine to healthy 12– 15-year-olds as well as encouraging hand washing, face masks in crowded places and ventilation for indoor gatherings. There are widespread calls, including from the NHS Confederation, the British Medical Association and Sage, for plan B to be implemented which would involve clear and urgent communication that the level of risk has increased.
This would include the introduction of mandatory COVID-19 passports, the making of face coverings compulsory and advising people to work from home, effectively aligning England with the restrictions still in place in Scotland, Wales and Northern Ireland.
Documents produced by the Treasury and the Cabinet Office’s COVID-19 taskforce which were leaked to Politico have suggested that a return to home working would cause up to £18 billion of damage to the UK economy over five months, although it is not anticipated that a move to plan B would last as long until March 2022.
