Summer 2022 UK Market Report
Other factors
Political uncertainty
Boris Johnson’s resignation and the change in dozens of ministers add uncertainty to the industry. The unrest comes at a time of progress on key legislation and policies which would have implications for construction, such as the Levelling Up and Regeneration Bill and the reworking of planning reformation.
The Conservative Party leadership race will be held from July until early September 2022, with Rishi Sunak and Liz Truss competing to be the next Prime Minister.
Liz Truss plans to revitalise the economy with an agenda of tax cuts and public spending. However, economists say that her plan, which includes reversing the rise in national insurance, suspending green levies on power bills and cancelling an increase in corporation tax in 2023, will increase inflation and result in higher debt bills for the government.
Rishi Sunak has been reluctant to commit to reducing tax increases and has warned that cuts would need to be funded by borrowing, recently saying “borrowing your way out of inflation is a fairy tale”.
Whoever wins the upcoming election faces a bleak economic outlook in the short term and a difficult time winning over voters.
Threat of reduced government investment
Public sector net borrowing excluding public sector banks was £22 billion in June 2022, the second-highest June borrowing since monthly records began in 1993 and £4.1 billion more than in June 2021.
Expenditure increased due to high debt interest payments, which have grown due to higher inflation. Interest paid on government bonds rose in line with the Retail Prices Index measure of inflation, which reached 11.8% in June.
Despite inflationary challenges, various factors will require spending. The Office for Budget Responsibility (OBR) outlined the following areas in its ‘June 2022 Fiscal risks and sustainability report’:
Rising geopolitical tensions
- Increased defence spending \ The Russian invasion of Ukraine has led to a reassessment of the sustainability of current historically low levels of defence spending across Western countries
- Cyber attacks \ The increased likelihood of a large-scale, disruptive cyber incident with significant economic and fiscal repercussions
- Global economic fragmentation \ Rising geopolitical tensions have also impacted economics with rising global trade policy tensions, the increasing use of trade restrictions, including sanctions to achieve broader foreign policy aims and fears of a return to global economic fragmentation.
Higher energy prices
- Fossil fuel price shocks \ High and volatile fossil fuel prices can be very disruptive economically and fiscally, as in the late 1970s and early 1980s
- Long-term changes to the UK’s energy mix \ Investment and alteration of the energy mix to reduce dependence on fossil fuels and meet the ambition to reach net zero carbon emissions by 2050.
Long-term fiscal pressures
- Updated demographic projections \ Demographic pressures have eased since the 2018 fiscal and sustainability report due to a lower birth rate, slower improvements in life expectancy and lower migration
- Latest policy, economic and environmental changes \ However, in the longer term, the pressures of an ageing population on spending and loss of motoring taxes in a decarbonising economy leaves public debt on an unsustainable path in the long term.
There is a challenging outlook. The OBR’s long-term projections show debt rising to 100% of GDP by 2052–53 and reaching 257% of gross domestic product (GDP) in 50 years if it accommodates the upward pressures on health, pensions and social care spending and the loss of motoring taxes.
The OBR highlights that compromises will be required to bring debt back to 75% of GDP — the level at which it stabilised in the government’s pre-pandemic March 2020 Budget. Namely, taxes to rise, spending to fall, or a combination of both.
Making allowance for “inevitable” periodic shocks would push debt to 100% of GDP by 2047–48 and nearly 320% of GDP in 50 years.
There is a possibility of geopolitical tensions escalating further, leading to increased defence spending commitment. Energy prices could spike even higher or persist at elevated levels, although both of these scenarios would lead to higher levels of debt.
For the construction industry, there is a solid pipeline to support defence, energy security, transition to net zero carbon and meet population needs.
The government committed on 30 June to spending 2.5% of GDP on defence by 2030.
Supporting the transition to net zero with nuclear is likely to require more public investment in constructing and decommissioning nuclear facilities. Construction costs of the additional capacity, targeted in BEIS’s energy security strategy, potentially approach £170 billion if the price of Hinkley Point C was a sensible guide.
Renewables will also require more public investment in storage capacity to overcome intermittency in wind and solar power generation, forecast to cost tens of billions.
The government recently announced the third set of schools in the school rebuilding programme, located in local authorities across the country. Other public and local authority spending continues, particularly around decarbonisation.
The UK's challenges are generally not unique, with governments worldwide announcing massive investments in energy and infrastructure to overcome energy and climate change risks.
The G7 recently launched The Partnership for Global Infrastructure and Investment, aiming to mobilise $600 billion by 2027 to deliver “game-changing” and “transparent” infrastructure projects to developing and middle-income countries.
COVID-19
Data from the ONS shows that COVID-19 infections reached their highest level in three months in England in the week to 13/14 July. The trend in the rest of the UK is uncertain.
The wave is being driven by the subvariant Omicron BA.5, which is now dominant.
Hospital numbers appear to have stopped climbing, and thanks to high levels of antibodies — either from vaccination or previous infection — the numbers of seriously ill or dying remain low.
China
China has pursued a “zero COVID-19” policy despite the increased transmissibility of the Omicron variant.
Locking down several cities has heavily impacted the economy, hitting industrial activity and consumer spending.
To encourage vaccine uptake, the National Health Commission (NHC) revealed that “all China’s incumbent state and party leaders” have been vaccinated against COVID-19 with domestically made vaccines. While nearly 90% of China’s eligible population are fully vaccinated, rates amongst the elderly are much lower, with only 61% of people over the age of 80 fully vaccinated and only 38.4% having received booster shots, according to the NHC.
China’s GDP grew 0.4% year on year in the second quarter, below the rate of 1.2% expected by economists and much lower than the 4.8% recorded in the first quarter of 2022.
To spur growth, China is issuing debt to fund big infrastructure projects. Authorities have given policy banks 800 billion yuan in new credit quotas and allowed the issue of 300 billion yuan in bonds.
Delivery issues
The Freightos update on 21 July indicated a mixed picture for shipping rates.
Although there is some evidence of a decrease in consumer demand, rates and volumes remain high by pre-pandemic standards. For instance, Asia–US West Coast ocean rates have fallen more than 50% since the start of the year but remain more than 4.5 times their level in 2019.
Another factor keeping rates elevated above the norm is persistent congestion. Freightos reports that ports remain backlogged in Europe, the US and increasingly in China as COVID-19 measures and bad weather are slowing down processing.
Widespread labour issues are also having an impact. Operations have been disrupted by a backlog of rail-bound containers in Los Angeles, truckers blocking a terminal at the Port of Oakland to protest a new California law limiting options for independent operators and another port worker strike in Germany.
Strong demand for goods shipped from Europe, along with port congestion, has kept transatlantic rates climbing. Freightos reports that North Europe–US East Coast rates are currently more than $8,000 for a forty-foot equivalent unit, which is 35% higher than at the start of the year.
Climate emergency
For the first time on record, temperatures in the UK exceeded 40C on 19 July.
Professor Stephen Belcher, chief scientist at the Met Office, said that research had shown that “it’s virtually impossible for the UK to experience 40C in an undisrupted climate, but climate change driven by greenhouse gases has made these extreme temperatures possible".
Professor Belcher said, “We are already committed to a level of warming and these extremes will get more extreme in the future. The only way we can stabilise the climate is by achieving net zero, and of course the UK has made some great strides in that direction. We want to stabilise the climate at a safe level and that means reaching net zero soon”.
Adaption
The extreme weather highlighted the need to achieve net zero as soon as possible, along with signs that society will need to adapt.
High temperatures caused issues across the rail network, as rails buckled in extreme heat. Network Rail explained that the temperature of the rails can easily rise to 20C higher than the surrounding air temperature, saying “rail can expand drastically in extreme temperatures — about 30cm for each kilometre of rail. Our 30,000km of railway stretched by 9km on Tuesday [19 July]”. Overhead lines can also sag and drop, becoming a hazard.
As temperatures become well above those which its infrastructure is designed for, Network Rail has launched a new taskforce led by independent experts to investigate and make recommendations on how the railway can develop resilience. The review will consider four key areas, with three areas focused on gathering insights from other countries.
Dr Friederike Otto, from the Grantham Institute for Climate Change, Imperial College London, said that whether 40C becomes “a very common occurrence, or remains relatively infrequent, is in our hands and is determined by when and at what global mean temperature we reach net zero”. She also said that it is dependent upon ourselves whether every future heatwave will “continue to be extremely deadly and disruptive” and that we have “the agency to make us less vulnerable and redesign our cities, homes, schools and hospitals and educate us on how to keep safe”.
The value of decarbonisation of buildings
The World Economic Forum highlights that the construction and operation of buildings account for 38% of global greenhouse gases. According to the World Green Building Council, green buildings represent a $24.7 trillion investment opportunity by 2030.
The World Economic Forum’s Net Zero Carbon Cities Programme has developed the Building Value Framework aiming to shift the perception and definition of decarbonisation investments, as the cost of interventions is a critical barrier.
The framework will support key decision makers, including building owners, asset managers, real estate developers and investors, to use a more holistic approach when decarbonising buildings.
It incorporates detailed descriptions of investments' financial and non-financial value outcomes and a practical checklist for futureproofing building investments.
Key asset and city outcomes
Emissions reduction
- Minimise embodied carbon
- Minimise operating carbon
- Maximise use of locally generated clean electricity.
Environmental improvement
- Minimise water wastage
- Minimise waste
- Increase biodiversity.
User satisfaction
- Improve health, well-being and productivity.
Systemic value efficiency
- Improve efficiency Increase flexibility
- Improve interoperability
- Improve resilience
- Improve grid services.
Socio-economic improvement
- Enhance job creation
- Lower energy costs to consumers.
Plugging the gap between ambition and delivery
The economic affairs committee of the House of Lords has warned that there is a risk of a “disorderly transition” away from fossil fuels, with a gap between the government’s low-carbon power generation ambitions and “practical plans for delivery”.
The committee has made a series of recommendations in a report entitled ‘Investing in energy: price, security and the transition to net zero’. These include:
- A drive to improve home insulation
- The development of financing models for new technologies such as carbon capture and storage, blue and green hydrogen and re-examination of the onshore wind sector
- A National Planning Policy Framework which sets energy security objectives alongside climate change goals
- The UK Infrastructure Bank to focus on “financing innovative and potentially riskier projects”
- Ensure that transitioning away from fossil fuels does not lead to dependency on minerals used in renewable power technology; don’t swap one form of dependency in oil and gas for another.
The topic will be a vital issue for the next prime minister.
The high court also recently ordered the government to outline exactly how its net zero policies will achieve emissions targets after a legal challenge from Friends of the Earth, ClientEarth and the Good Law Project.
The judgement found that the net zero strategy lacked any explanation or quantification of how the government’s plans would achieve the emissions targets and therefore had failed to meet its obligations under the Climate Change Act (CCA) 2008.
BEIS will prepare a report to be presented to parliament by April 2023 defining the delivery of the strategy and specifying emissions cuts for each sector.
