Winter 21/22 UK Market Report
Other factors
Threat of further tax increases/reduced government investment
The 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 £36.6 billion (5.2 percent) less than a year earlier. Government support for individuals and businesses during the pandemic led to a £205.2 billion (27.8 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 £321.8 billion. This is equivalent to 15 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.
As well as recovery from the COVID-19 pandemic, there are other challenges that will require public spending to tackle. These include costs associated with an ageing society, balancing inequalities arising from the pandemic/levelling up and meeting other challenges such as the transition to net zero carbon. With pressures from rising energy prices and the soaring cost of living, the government are facing calls to support households especially considering tax changes from 1 April 2022, such as the implementation of 1.25 percent increase to National Insurance contributions to fund the NHS and social care.
The government confirmed at the end of 2021 that the eastern leg of HS2 to Leeds and a full high-speed east-west line linking Manchester to Leeds will not be built. Instead, scaled back rail investment is planned, made up of regional upgrades and some new lines. This move has been met with anger and disappointment in the north of England and the Midlands, particularly due to the government’s well documented levelling up agenda, with concerns that the scaling back will mean reduced onward investment and benefits being delivered.
Out of respondents to our Winter survey, 44 percent said that they are concerned that the announcement means that other promised investment in infrastructure will be reduced or scrapped. Some respondents said that rising costs and debt meant that it was “inevitable” that available funding would be impacted by reducing government spend, however, others were more optimistic that the monies will be diverted to other infrastructure schemes.
Data from the ONS shows that although construction output is 1.3 percent above its February 2020 level, the recovery to date at a sector level is mixed. All new work is 1.6 percent below its February 2020 level, with infrastructure 49.3 percent (£923 million) above and private commercial 28 percent (£698 million) below their respective February 2020 levels in November 2021. Infrastructure is, to some extent, masking the reductions in other sectors.
Continued growth is forecast for construction due to a strong private housing outlook and investment in rail, health, education and industrial construction.
Brexit
The UK withdrew from the EU at 23:00 GMT on 31 January 2020 (00:00 CET). At the time, forecasted impacts to the construction industry included:
- Impacts on labour: 73 percent of respondents to our 2020/21 Winter market survey said that there was a shortage of skilled labour at that time and 81 percent said that a shortage of labour post-Brexit would lead to increased construction costs. Whilst it was recognised that government initiatives to facilitate more apprenticeships will help in the longer-term, only 12 percent of respondents thought that this would provide sufficient skilled tradespeople in sufficient time
- Challenges importing materials: ONS data prior to the withdrawal suggested that 15–20 percent of materials used in the UK construction industry are thought to be imported from abroad, with 60 percent coming from the EU, according to data from BEIS
- Opportunities to become more efficient and modernise: it was thought that the challenges with labour and materials may give opportunities for the construction industry, for example, labour shortages could encourage the use of modern methods of construction (MMC) and technology.
Respondents to our Winter survey saw 41 percent say that they felt that the impact of Brexit on the construction industry had been understated. However, 43 percent of respondents thought that it was too early to say, given the impacts that the pandemic has also had on the industry, leading to 86 percent of respondents saying that the construction industry has not yet seen the full impact of Brexit.
Some impacts which have been seen/are expected are:
- Reduction in EU labour: Prior to Brexit, London was dependent on migrant construction workers with over half the workforce being from the EU or the rest of the world. Figures from the ONS show that the number of construction workers in London from the EU fell 54 percent between April 2017 and April 2020. Data also shows that the UK-born construction workforce is ageing, with 10-20 percent reaching retirement age in the next five years. The Mayor of London, Sadiq Khan, has recently called on government to create a temporary visa scheme to help sectors like construction that are struggling with shortages of workers. Khan’s vision is that the visa would offer at least 12 months to work in the UK and be appropriately tailored to allow workers to operate on a self-employed basis. The visa may not come to fruition but highlights the concern regarding construction skills shortages and the impact that this could have on recovery from the pandemic, particularly as activity continues to increase.
- Products: The plan to replace CE markings with the UK Conformity Assessed (UKCA) mark has been pushed back to 1 January 2023, from a previously planned introduction of 1 January 2022. Many industry bodies were warning that the UK did not have sufficient testing and certification capacity and ability to make the change. Following the postponement, the government said it was not prepared to extend the deadline again.
- Changes to customs declarations: Full customs controls have been introduced from 1 January 2022. The Staged Customs Control Rules which allowed UK businesses to delay import declarations have ended and now declarations must be made and relevant tariffs paid at import. Goods from Ireland and Northern Ireland are exempt, which will continue for as long as discussions on the operation of the Northern Ireland Protocol between the UK and EU are ongoing.
The Omicron variant caused a large increase in cases in December 2021 and the associated self-isolations caused impacts to services. Some contractors reported delays to progress due to gangs of specialist trades (e.g. zinc, waterproofing) testing positive, as they were finding it difficult to find replacements or alternatives were not always feasible due to required warranties.
Out of contractors who responded to our Autumn 2021 survey, 91 percent said that the Construction Leadership Council’s Site Operating Procedures were continuing to be followed on their projects despite these procedures having become reference documents from 19 July 2021, following the lifting of restrictions. Therefore, it was not a surprise that 56 percent of respondents to our latest survey said that there were not any new or additional measures being implemented on site as a result of the rise of the Omicron variant.
From those respondents who said that additional measures have been implemented, these measures were:
- Increased testing (although some reported that this was constrained by the availability of kits)
- Increased home working
- Limited access to site/rotation of the site team
- Mask wearing
- Social distancing on site.
The situation with Omicron seems to be improving and Plan B rules ended in England on 27 January 2022, with working from home guidance lifted sooner. The government said that the rules could be lifted due to the successful roll-out of booster vaccines and that scientists believed that the Omicron wave had peaked nationally. The intention to end self-isolation rules for people with COVID-19 in the coming months was also announced. The devolved governments in Scotland, Wales and Northern Ireland also made similar announcements easing restrictions.
