Housing and hospitality take Covid’s greatest hits, while surging home improvement caught suppliers by surprise. But the Brexit exodus and lockdown have cut consumers, which construction depends on - even as the Bank of England promises its return
Few puns emerge from ophthalmology. But for two decades or more, 2020 vision became the default tag for numerous reports peddling upbeat futures.
Sadly, when it finally arrived, so too did SARS-CoV-2. From now on, revised by reality, any associations made with 2020 will not suggest a year of enlightenment and clarity, but one of darkness and confusion.
It will forever be recounted as the year when things changed suddenly and unexpectedly. The beginning of a period of grimness and damage, like 1914 and 1939.
Data for most of the year are in, and we can now start to assess the economic damage done in 2020 to both the overall economy and the construction sector. Even with the Bank of England's optimism about the vaccination programme and hope for a 'material recovery in household spending' it is predicting a substantial 4.2% shrinkage in the economy in the first three months of 2021.
Chart 1 compares activity in the latest month with the month a year earlier. It clearly shows the severe hit taken to the economy from March 2020, when the lockdown was imposed. It also shows the typical volatility of construction. If the economy sneezes construction generally gets a cold, so while the economic activity dropped by almost a quarter into a trough, construction activity fell by close to a half.
More positively, construction has pretty much regained the level it was at last year. This is not true of the economy at large, where increasingly there are signs that deep damage has been done in some sectors such as hospitality and other consumer-facing service activities.
If we dig deeper into the figures, we find that in the second quarter of 2020, the gross value added to the economy by hotels and restaurants was just £3.6 billion, compared with £33.3 billion the year before. A sector that delivered £133 billion to the economy in 2019 is likely to see that almost halve when the final sums are done for 2020. The transport sector has also taken a beating, with a 60% drop in gross value added in the second quarter. It too has failed to recover.
But as Chart 2 shows, the pattern across the construction sector has not been even. Infrastructure has been the least affected of the sectors. Partial reasons for this may be the greater propensity for infrastructure to be outdoors, and its tendency to be less labour intensive. Also, the sector has been picking up pace in recent years with strong underlying growth.
The commercial sector, which took less initial damage in lockdown than other building sectors, remains well below its pre-pandemic levels. Much of its work will be in cities, which present greater restrictions. It is also likely that projects scheduled to start this year have been put on hold, particularly with concerns over potential shifts in demand for offices and retail space.
Housing took the deepest dive when the nation went into lockdown, with many major builders holding fire for some form of all-clear before resuming operations. Work did resume quite promptly but it is still running well below last year’s level, despite much noise about a bounce back in the housing market.
The most intriguing sector is housing repair, maintenance, and improvement. The lockdown sparked a surge in interest in home improvement and DIY. Building suppliers were taken by surprise as demand surged for some products. It is still too early to say whether the rise in home improvement activity above last year’s level is down to firms catching up on delayed work or new demand.
This relatively positive note for construction might be one of the factors that saw architectural practices ending the year on an upbeat note. On both measures of expected workloads and future staffing, the December RIBA Future Trends Survey was positive, as is show in Chart 3.
Matching sentiment surveys to actual workload levels is tricky at the best of times, but harder when market volatility is high and mood swings are dramatic. But the data does point to a strong performance in the private housing sector. And, as the December survey commentary suggests, this fits with the notion of people moving to new areas or adapting their home to better accommodate current ways of working.
Certainly, the construction output data and surging sales of home improvement materials supports this idea. But whether this is a flash in the pan or a longer-term step change in activity is hard to know.
But looking upstream at the flow of larger projects, Chart 4, using Barbour ABI data, shows contract awards over 2020 compared with the previous three years. It highlights the deep hit to some sectors, and this is without adjusting for inflation. The medical sector did see more work coming through, which seems reasonable. Infrastructure remains on an upward slope, so a rise would have been expected.
However, most other sectors, particularly hotel, leisure, and sport, took a dive in 2020. This means the work flowing through to site has slowed. Given that work slowed dramatically, it is hard to gauge how significant the impact of this drop in new orders will be to activity in coming months. But it seems likely that some more specialist areas of construction are set to feel the pain.
Barbour ABI data for planning applications and approvals up to October 2020 shows that construction activity related to the hospitality sector was actually strengthening ahead of the pandemic, when all other sectors were in decline on this measure. Comparing the value of planning approvals over the 12 months to October 2020 with the previous 12 months, the hotel, leisure, and sports sector comes out as the strongest, up 30%.
A similar picture emerges from the applications data, even when the long-planned large London Resort proposal for a £3.5 billion development at Swanscombe Peninsula in Kent is excluded from the figures. Although in most sectors the value of plans being submitted was on the rise, there seemed to be a strong sense of confidence in the hospitality sector prompting developers to push plans forward.
How much of this might have been down to suppressed demand caused by Brexit uncertainty being released as part of a ‘Boris bounce’ it is hard to tell. Clearly now though the data suggest the bubble has burst dramatically in the hospitality sector with plans not necessarily converting to construction contracts in the wake of the pandemic.
If this illustration of one sector tells us anything, it is not to expect everything to spring back to normal. There is likely to be a very long tail of effects of the pandemic.
One of those that is now beginning to show through in the data is the loss of population as far more migrants return home than arrive in the UK.
The Office for National Statistics in January published figures showing a fall in the non-UK born. Its notes made strong reference to constraints and issues within its methodology, which for obvious reasons must be consistent over time but come under strain when there are unusual events.
More recently the Economic Statistics Centre of Excellence published a blog that provided evidence that the non-UK born population was 1.3 million down in the third quarter of 2020 compared with the third quarter of 2019. This would make it the biggest fall in the UK population since World War II. Importantly, it suggested that the non-UK born residents of London had dropped by 700,000, about one in every 13 residents.
In 2019 there were estimated to be 9.5 million non-UK born people living in the UK and about 6.2 non-UK nationals. A core group will stay for a long while, some taking up citizenship. But there will always be a large flow arriving and leaving. Students accounted for almost 500,000. And large numbers will have worked in the hospitality sector before it was hard hit by the pandemic.
The pandemic will have encouraged many who lost work in hospitality to leave the UK for home, along with many students. The incentive to return would have been limited and potentially reduced still further by the UK’s shift towards Brexit.
The eventual figures may differ in the final analysis, but the loss of large numbers of migrants to the UK is understandable. Furthermore, it helps to make sense of why house prices are rising in London when rents are falling. It also might help explain the more muted rise in unemployment than might have been expected.
If the figures are right, this loss of close to 2% of the UK population will hit GDP hard, if only because of loss of consumption. If the drop is sustained, it presents significant issues for the built environment, not least on demand for homes. Also, as most of those that have left are likely to be of working age, it narrows both the tax base and talent pool. The latter would be of particular concern to the construction sector which has for years relied heavily on migrant workers.
The New Year message from the data seems to be that prospects for construction in 2021 will remain hard to predict and we should expect many more quirks as the effects of the pandemic play out. The phrase ‘interesting times’ comes to mind.