Winter 21/22 UK Market Report
Wider context
GDP and construction output
The latest data from the ONS indicates that monthly real GDP is estimated to have grown by 0.9 percent in November 2021, compared to a 0.2 percent increase in October (revised from 0.1 percent). This increase brings GDP 0.7 percent above its pre-COVID-19 level (February 2020).
Increases were seen across services (0.7 percent), production (1 percent) and construction (3.5 percent) between October and November 2021, meaning that construction and services output are both 1.3 percent above their pre-COVID-19 level while production remains 2.6 percent below.
The 3.5 percent increase in monthly construction output was the largest monthly rise seen in construction output growth since March 2021. Anecdotal evidence from survey returns received by the ONS suggested that the reasons behind this were strong demand for work, easing of supply chain bottlenecks for certain products and the unseasonably mild and dry weather.
These themes are similar to other analyses of the construction industry. The IHS Markit/CIPS UK Construction update noted that "An improved alignment between demand and supply helped to soften inflationary pressures at the end of 2021. Purchasing activity increased at the slowest pace for three months, while supplier lead times lengthened to the least marked extent since November 2020." It also highlighted that customer demand was relatively resilient in December 2021 with new order volumes recorded as the strongest since August 2021 and higher levels of work having been recorded for 19 consecutive months.
There are some reports that decision making has slowed due to the Omicron variant. The Construction Leadership Council (CLC) cautioned that whilst there was an improvement to the supply situation in December 2021, which reduced pressure on prices, it felt this was linked to a seasonal decline in activity and anticipated challenges would remain in UK production capacity for some products and in relation to logistics and shipping.
Rising cost of living
The CPI from the ONS rose to 5.4 percent in the 12 months to December 2021, up from 5.1 percent in November. This is the highest level since March 1992, when inflation reached 7.1 percent.
The largest contributions to the increased CPI were from food and non-alcoholic beverages, restaurants and hotels, furniture and household goods along with clothing and footwear. These were partially offset by a downward contribution from transport, recreation and culture.
Inflation is widely expected to peak at 7 percent in April 2022 when the energy cap is reviewed — the energy industry is suggesting that household energy bills could increase by approximately 50 percent. The Governor of the Bank of England, Andrew Bailey, said that the financial markets now do not expect energy prices to start easing back until the second half of 2023, causing concern that higher levels of inflation will not be as short-lived as previously hoped.
With wages rising in key sectors due to shortages of workers prompting firms to increase pay to attract and retain employees, there is concern that pay increases will spread economy-wide, resulting in above-target inflation becoming more entrenched. Economists have predicted that interest rates could reach as high as 1.25 percent by the end of the year which could impact those with mortgages.
The squeeze on households is a concern, particularly as low earners are set to be hardest hit by energy price increases. A number of factors are said to be behind the increases in food prices, including higher prices for raw materials and higher costs for processing, packaging and distribution. Rising energy costs have also impacted the cost of producing various food and drinks along with supply chain disruption affecting production. These factors make it difficult for costs to be cut and there is a concern that there will be groups of people who may have to choose between food and fuel unless the government intervenes.
Employment and labour shortages
Data from the ONS shows that the number of job vacancies rose to a new record of 1,247,000 in October to December 2021, an increase of 462,000 compared to the pre-COVID-19 level in January to March 2020. The ratio of vacancies to every 100 employee jobs reached a record high of 4.1 in October to December 2021.
In construction, 2021 saw record highs of vacancies and whilst there was a slight easing (-3.9 percent) in October to December 2021 compared to the previous quarter thought to be due to uncertainty around the Omicron variant, overall vacancies have grown 61.5 percent since January to March 2020.
Delivery issues
A survey by the Chartered Institute of Procurement and Supply (CIPS) found that 85 percent of UK supply chain managers polled had faced supply chain disruption in 2021 and that most expected supply chain issues to continue in 2022. Nearly half of the respondents (48 percent) said that they had increased prices as a result of the disruption and 14 percent have completely stopped selling some products.
The government implemented various measures at the end of 2021 to reduce the HGV shortage, including:
- Relaxing drivers’ hours rules until 10 February 2022
- Increased operational flexibility until September 2022 by relaxing restrictions on late-night deliveries to supermarkets, food retailers and distribution centres
- Additional drivers added to the existing visa scheme to support food industries and additional fuel drivers
- Provided additional funding to the Mode Shift Revenue Support grant scheme to take 29,000 more lorry loads of goods off the roads and onto railways or inland waterways until the end of March 2022
- Provided additional support and funding for the training of new HGV drivers, including incentive payments for employers to take on apprentices
- Expanding HGV driver testing capacity by 90 percent compared to pre-pandemic levels.
These measures have improved the situation, although some are cautioning that January and February are usually a quieter times for the logistics industry.
Another key factor in the UK supply chain disruption has been the issues faced by the global shipping industry. The latest analysis from Sea-Intel indicates that container port congestion is worsening at the start of 2022. Data from last year shows that congestion has taken out 11 percent of global containership capacity across 2021 while volumes grew 7 percent. In normal times, around 2 percent of containership capacity is tied up waiting at ports.
The New York Times reported on 16 January 2022 that there is concern that disruption could worsen due to China’s zero-tolerance approach to COVID-19. The article highlights that China is home to about a third of global manufacturing and lockdown measures are being implemented in an attempt to stave off the Omicron variant. Approximately 1.5 percent of China’s population are in lockdown and Hong Kong has suspended connecting flights from around 150 countries and territories considered high risk of COVID-19.
China is also hosting the Winter Olympics in Beijing in February and plans to stop production in factories across its northern cities to improve air quality for the event. This is likely to affect the availability of supplies later in the year.
It is hoped that eventually a balance will be found between supply and demand and although it is hoped that this will reduce shipping costs – the global container freight rate index reached circa USD $9,300 in December 2021 up from circa $1,330 in February 2020 – experts are warning that this is unlikely due to widespread cost increases and the need to decarbonise.
