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Is there any sign of economic hope in the Covid-19 gloom?

Words:
Brian Green

Like everything, construction is braced for a big hit from coronavirus and its aftermath. Are there any signs of hope?

Graph 1. GB construction output (3 month moving average)
Graph 1. GB construction output (3 month moving average) Credit: ONS

The UK, among many nations, failed to recognise in time the potency of the coronavirus pandemic; it was underprepared and dithered over policy at crucial early stages. Laboured linear thinking was applied to an exponential problem that demanded extremely rapid and robust action. Delay and unpreparedness mean more death, a more dramatic and longer lasting lockdown, and more economic damage.

That might be an unforgiving assessment. But, given that pandemic tops the National Risk Register of Civil Emergencies, stripped of caveats, this could well be the conclusion that flows from the national inquiry that surely must follow this global disaster.

If that is the assessment, it would imply the need to change the world we live in – or at least how we treat the threats that face us. This in turn suggests that architects and others will be charged with, and play a critical role in, reconfiguring the built environment to accommodate the lessons learned.

Or, it could mean just returning, as best we can, to how things were. That’s a debate for when we reach the sunny uplands where Covid-19 is kept under control.

Today, stuck in the boggy and misty valley of a lockdown, there are critical immediate issues to tackle – life and death and the heavy toll to the economy and personal life.

There is little evidence yet to guide our understanding of how this evolving pandemic will eventually play out for architects or the wider construction sector. But there are clues that might help us read the situation, confused as it is, to guide how to react.

Graph 2. Markit/CIPS and Bank of England Agents' scores
Graph 2. Markit/CIPS and Bank of England Agents' scores

Within the UK, as in many countries, few if any will escape this episode unscathed. The immediate pain has been unevenly borne and will be unpredictably distributed over time. Architects may not have been the first or hardest hit, but they along with the construction sector generally have been hit hard.

 

Ever-changing picture

The recent survey by RIBA paints a shocking picture of the speed of impact and the challenges it poses. But the picture is moving and will evolve rapidly.

It is near futile to seek to assess with any precision the impact in the short term and the likely impact over time. The data available provide little more than smoke signals in a gusting wind. The policies adopted, informed by science and economics, will be key.

Ultimately, how and how fast the virus spreads will drive policy making. But here lies the core uncertainty. The exponential nature of viral spread makes the mathematics eerily uncertain and heavily swayed by relatively minor differences between the assumptions made in modelling and what is actually happening on the ground.

This suggests that having introduced a lockdown at a huge cost, much already sunk, the government is likely to err on the side of caution when unlocking it. New cases will have to be low enough to a point where any system of testing, tracing and treating can keep the virus suppressed in advance of a vaccine.

We can assume that tentative steps will be taken to unlock parts of the economy as early as thought possible, but if these moves reignite infection rates they will be reversed. The uncertainty here means that it is not possible to accurately assess the scale of the damage that Covid-19 might bring to the construction sector, architectural practices and to individual architects. This makes it hard for businesses and individuals to gauge what to do for the best. However, one clue to how the sector might fare is its performance before the lockdown.

 

Missing Brexit bounce

There had be much hope of a lift in activity once the Brexit withdrawal deal was settled. Uncertainty had been holding back investment and the sector had seen subdued growth for some period. And the sense that those breaks would be removed had optimism flowing through the veins of architects. The main RIBA Future Trends survey indicator rose in both January and February to reach its highest figure for almost two years.

The latest output figures, however, showed no sign of a bounce, but as there would be an inevitable lag, that is understandable. Indeed, February was a washout as heavy rains seemed to dampen activity on site, with private house building significantly down. But a broader look provided by Chart 1 suggests the industry has been holding to its recent pattern of rising new work and falling RMI.

The Bank of England agents’ assessment for the industry is plotted in Chart 2. It shows a downbeat start to the year with later data even more downbeat, reflecting the early impact of Covid-19 in the first weeks of March. The Markit/CIPS survey had spiked upward in February, but the enthusiasm this signalled was more than wiped out in the March survey. That put activity at its lowest since April 2009.

Graph 3. Architects' workload expectations
Graph 3. Architects' workload expectations

And as we see in Chart 3, the RIBA Future Trends survey has plunged, the early optimism wiped away across all sectors. The survey covers responses across March, so many will reflect the mood pre-lockdown. April is expected to show far worse results.

Looking beneath the market to the resilience of companies doing the work, increasing numbers of construction firms appear to have been struggling. Insolvencies have been rising for some while and the share of construction firms among insolvent businesses is up.

Overall, the data paints a picture of a construction industry muddling along with hope of better times in 2020 and beyond, but lacking vitality. That and dashed hopes present a problem, particularly with financial fragilities latent within the contractor base.

The RIBA survey picked up the rapidity of the shutdown. This has also been analysed by Barbour ABI which is producing weekly Covid-19 construction briefings. As of 9 April, Barbour ABI found that Covid-19 had delayed £58 billion projects that were already under way, a further £10 billion at the contract award stage and various other projects in the planning and tender pipeline – almost 4,300 projects in all.

Housing represented the biggest sector, accounting for more than half the projects by value and almost 60% by number. Regionally, the biggest hits in terms of value are in London (almost £20.9 billion) and in Scotland (16.6 billion).

 

Economic, social and fear factors

The impact on the fabric of the sector is obvious. It’s huge. The government is covering some of the cost through such measures as supporting furloughed workers and construction’s huge army of self-employed. But there are gaps, as highlighted by RIBA, such as the numerous practices where dividends, rather than earnings, provide the main income. If the sector is to rebound and not suffer heavy permanent damage, these gaps must be plugged to sustain already creaking UK capacity in the construction sector, which as mentioned is fragile.

Changing focus from potential damage on the supply side to prospects on the demand side, there are sectors that look vulnerable in wake of lockdown.

The economic impact will be a major factor shaping the future. But continued nervousness and fear of social mixing will also play a part. Assessing the economic prospects is scary, even if uncertainty means that forecasts should be treated as guides to the potential impact and not predictions of a likely future. Taking two forecasts from official sources, the Office for Budget Responsibility points to a drop in annual GDP of about 13% (the worst drop in the UK in living memory) while the IMF forecasts the worst global economic downturn since the Great Depression, 90 years ago.

They’ll most likely be wrong. But a decimal point here or these is irrelevant. All you need to know is that the impact will be huge. More pertinent is how fast and how strongly economies will rebound.

That is a matter of huge debate. The critical factor here is the capacity of industries as they resume and the demand within their markets. Will they have the capital, skills, corporate infrastructure and supply chains in place to return to normal or not? Have they sustained permanent damage? Have their markets and the demand for their goods and services been undermined by the pandemic?

 

Home and away

Before looking at the domestic market, overseas work has become increasingly important for UK firms. The hit to the global economies will take a toll. But the long-term prospects in developing and maturing markets will remain an area of faster growth for investment in the built environment. The future for UK architecture in these markets is clearly less predictable than before Covid-19. This does not mean that expansion in these markets need slow, but how to sustain and grow activity there will demand serious thought in light of the inevitable changes that will flow in the wake of the pandemic.

At home the most obvious area of concern is the housing sector, the engine of growth since its collapse during the past recession. A consensus is forming among experts that while prices will fall it will be transactions that take a tumble.

Even as early as late March, Savills suggested UK housing transactions might fall by half. That would be far lower than at any point in the past recession and bleaker predictions can be found. This is not simply a problem for estate agents. New build housing numbers track the overall private sales market, taking a share normally about 10%. In recent years this share has been boosted by Help to Buy.

A halving of transactions may not directly mean half the homes built, but the link between overall private sales and the number of private homes built is strong. It now seems unlikely that Help to Buy will be pulled as planned.

Investment in the commercial sector is also likely to take a knock. High streets and retail stores, already under existential threat from online shopping, will not come out of this without much deeper damage. Offices also may become less attractive to investors.

For smaller more locally based practices the home improvement sector will be a worry. This has already been weakening, particularly the high-end improvement seen in London. The chances of big-ticket spending holding up in the wake of the economic storm we are entering are weak at best. Both earnings and wealth will take a beating in the downturn. In the past recession equity-rich Baby Boomers stepped up investment in home improvement and softened the blow. This time it may be different.

But there is scope for hope, albeit speculative, for those who rely on this sector for commissions. The value of home and space has seldom been more appreciated than with the lockdown and the need for a place to work at home never more realised. These may prove to be prompts for households to divert investment from, say, holidays abroad to improving their homes.

It seems unlikely that the sector will not see ruptures. But the need to sustain capacity, as far as possible, will be paramount. The industry is vital in reshaping the world in which we live, a world that is changing and may change faster as we emerge from this pandemic.

Necessity is the mother of invention. So, we might expect to see a surge in innovation in the years ahead, in how we do things and in how we shape the environment to do them. Here the value architects can bring will be in demand.

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