Spring 2022 UK Market Report
Other Factors
Threat of further tax increases/reduced government investment
With the rising cost of living and anticipated need for further government support, there is the threat of a reduction in government investment which would impact the construction industry.
ONS data shows that borrowing in the financial year ending March 2022 was less than half that of financial year ending March 2021, but it remains higher than each of the seven years before the COVID-19 pandemic when expressed as a ratio of GDP.
Data from the ONS also shows that new work dropped off between February 2020 (pre-COVID-19) and February 2022, except for infrastructure, which increased by 25.6 percent in the period.
The government has made pledges to level up the UK. The cabinet minister responsible, Michael Gove, recently said that rising prices make the government’s plans to reduce regional inequalities more difficult and important.
The UK’s new energy strategy was also recently launched to raise energy independence and tackle rising prices.
Key points of the strategy include:
- Constructing as many as eight new nuclear reactors
- Reforming planning laws to speed up approvals for new offshore wind farms
- Doubling targets for hydrogen production to help provide cleaner energy for industry
- Considering reforming rules for installing solar panels on domestic and commercial buildings to increase solar capacity
- Introducing a £30 million “heat pump investment accelerator competition” to make heat pumps and, in turn, reduce demand for gas.
Large infrastructure programmes are also progressing. Overall, government investment looks set to continue to support recovery from the COVID-19 pandemic, level up the UK and support the transition to net zero carbon.
COVID-19
A record 4.9 million people in the UK had COVID-19 during the week ending 26 March, according to ONS data.
From our survey, 65 percent of respondents said that the rise had impacted their projects with increased numbers off work. Some reported that this had caused programme impacts as subcontractors were unable to attend site, with pressures also caused by the short notice of absences.
China
Since March, China has faced its worst COVID-19 outbreak since early 2020. China has persisted with its ‘zero-COVID’ approach, implementing lockdowns. Shanghai’s lockdown started at the end of March and measures were subsequently tightened to reach their zero-COVID target. Its long-awaited milestone of three consecutive days with no new COVID-19 cases outside quarantine zones was achieved on 17 May, but it isn't expected that the lockdown will be fully lifted until June. Most restrictions on movement will remain in place until 21 May before resuming gradually. In Beijing, millions work from home, confined to their districts. Non-essential businesses such as museums, cinemas and schools (except universities) closed to try and stop a COVID-19 outbreak. The measures impact China’s economy: the latest figures released by China’s National Bureau of Statistics showed unemployment rose to 5.8 percent in March, which is the highest since May 2020. Data also shows that trade slowed in April as local lockdowns reduced demand and production. Export growth decreased from 14.7 percent in March to 3.9 percent in April. According to details released by IHS Markit, the Caixin purchasing managers’ index plummeted to 36.2 in April from 42 in March. A reading below 50 indicates contraction.
There are concerns about what the Chinese slowdown means for the global economy. In some instances, the reduction is beneficial. For instance, the decline in demand from China, the world’s largest oil importer, has helped prevent oil prices from surging higher with the news of the EU planning to phase out Russian Brent Crude oil imports.
However, the manufacturing slowdown may have wider repercussions. Pantheon Economics analysis shows a close link between USA manufacturing and China’s manufacturing, with the USA running typically three months behind China.
The Institute for Supply Management (ISM) index, a monthly metric of the USA economy based upon a survey of purchase managers at more than 300 manufacturing firms, has slowed recently. A reduction was shown for a second consecutive month in April, marking its fifth decline in the last six periods.
A slowdown in manufacturing risks impacting the economy, particularly in areas where factories employ large proportions of the population. However, Pantheon Economics notes that manufacturing accounts for approximately 11 percent of the USA’s GDP, compared to 26 percent of China’s, meaning that the USA is less exposed.
The lockdowns have also raised concerns that crucial supply chains could be disrupted and there may be issues with product availability later in the year as a result. There has already been an impact from factory shut-downs earlier in the year to ensure good air quality for the Winter Olympic Games in Beijing and pressures at ports in avoiding COVID-19 outbreaks previously.
Delivery issues
The latest update from Freightos also highlights the impact of the slowdown in China. It suggests that Shanghai’s trucking capacity is down 45 percent, making it difficult to get materials and shipments to and from ports. Along with the other challenges of lockdowns, there is an estimated 20–30 percent drop in export volumes from Shanghai and a two-day wait for arriving vessels.
Exports are diverted to alternate ports such as Ningbo, where volumes have increased by 14 percent, causing additional congestion. Transpacific rates have fallen 5–7 percent since mid-March and Asia-Europe rates have reached their lowest level since last June — however, shipping costs remain significantly higher than pre-pandemic levels. When China lifts lockdown restrictions, a rebound is expected, increasing congestion, delays and shipping rates. COVID-19 and impacts from the Russia-Ukraine war are disrupting air cargo and generally, rates remain more than three times their typical pre-pandemic level. Increasing oil costs translates to higher diesel prices, making deliveries more expensive. The conflict in Ukraine is also impacting ground transport in Europe with logjams reported. Border closures also disrupt rail services.
