Potential COVID-19 (Coronavirus) Economic and Construction Impacts - Timber ...
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
(Updated 24 April 2020 – Latest Updated Text in Red)
Potential COVID-19 (Coronavirus) Economic and
Construction Impacts
UK Economy
It is expected that the UK economy will contract sharply in 2020 H1. As the negative effects have
occurred since the start of March and will only increase in the next few weeks, economic activity in
2020 Q2 is likely to suffer the largest impacts.
The full impacts on the UK economy will, however, only be clear after it is known if the coronavirus is a
temporary issue primarily affecting economic activity in the first half of 2020 before warmer weather
reduces its impact that is represented by a ‘V’-shaped or a ‘tick’ sharp recession and immediate but
slower recovery, if the coronavirus continues to persist beyond the Summer that would be represented
by a ‘U’-shaped recession or whether infections fall away in Summer 2020 and then rise sharply again in
Winter 2020/21 slowing the UK economy again, represented by a ‘W’-shaped recession.
Until 16 March, the UK government’s strategy was based on allowing coronavirus to spread at a rate
slow enough not to overwhelm the NHS (flattening the curve) but fast enough that 60% population gets
‘herd immunity’ (mitigation). Government changed its strategy due to research from Imperial College
London (16 March 2020) and moved to suppression, more in line with strategies in Italy, Spain and
France. The Deputy Chief Medical Officer for England stated on 29 March that social distancing
restrictions would be reviewed in 3 weeks and on 16 April, as expected, the Foreign Secretary stated
that the current social distancing restrictions would be in place at least for another three weeks. In the
scenarios the CPA is working on, the assumption made on 23 March was that restrictions would be in
place for eight weeks, which means restrictions begin to be eased from mid-May.
On 23 March the Prime Minister announced social distancing measures for households and businesses.
At this point, construction on site and manufacturing facilities are permitted to stay open ‘where it is
safe to do so’ and workers that are able to work from home should do so. Many sites and factories
remain open although most house builders and some builders merchants have temporarily closed. Initial
concerns were for the economy were around manufacturing supply chains but extensive disruption has
not been reported as yet although there have been cases of issues around materials and machinery
components supply from affected countries such as China and Italy.
The earliest economic impacts have clearly been in the services sector, in particular, affecting
conferences, in-store retail, tourism, airlines, restaurants, bars, concerts etc. culminating in the
government order to close entertainment, hospitality and indoor leisure premises from 20 March.
Manufacturing sectors focused on export demand or requiring an international supply chains such the
automotive sector have also been badly affected and manufacturers have been implemented or
announced temporary shutdowns. Construction product manufacturers highlighted a rise in demand in
the week beginning 23 March as firms bought in advance of any potential curtailing of purchasing before
social distancing restrictions. However, since then there has been a sharp fall in demand. Many factories
have temporarily stopped production and furloughed workers although with considerable stocks, firms
report that they are still operating deliveries.
1
Estimating the economic activity loss so far, given the lack of official data covering March 2020, is clearly
extremely challenging and an evolving area. The Centre for Economics and Business Research (CEBR)
has looked at almost 100 detailed sectors and sub-sectors of the UK economy and attributed each a
score based on whether economic activity was continuing as normal with most employees still in work,
whether employees were working from home and were assumed to be economically active at 90% of
normal level or whether workers were at home but were not able to work given the type of activity in
the sector and sub-sector.
Their results at sector level are that the percentage of output lost during the period of social distancing
restrictions will be 14% for agriculture, 60% in mining and quarrying, 69% in manufacturing, 10% in
electricity and gas supply, zero in water and sewerage, 50% in construction, 58% in wholesale and retail,
39% in transport, 79% in accommodation and food services, 7% in information and communication, 18%
in finance and insurance, 20% in real estate, 10% in professional and scientific activities, 46% in education
and 81% in arts, entertainment and education. It is worth noting, however, that their 20% estimated fall
in real estate activity appears highly optimistic, particularly given how volatile the sector tends to be.
Although many real estate professionals are able to use technology to work from home and still show
prospective customers new properties, the shutdown of the housing market and delay of transactions
implies that the fall in real estate activity must be three or four times higher than CEBR have estimated.
The 50% fall in construction activity for the period of the social distancing restrictions does not appear
to be unreasonable given falls in house building (which accounts for 27% of total construction output)
and improvement works on the housing stock, which accounts for around 10% of total construction and
large infrastructure projects, which account for around 15% of total construction.
The most recent data covering UK economic activity are the IHS Markit/CIPS Purchasing Managers
Indices (PMI), which are timely surveys of monthly activity across UK Manufacturing, Services and
Construction. On Monday 6 April but IHS Markit/CIPS published the Manufacturing PMI for March on 1
April and the Services PMI for March on 3 April. The survey data were collected between 12 and 27
March so it covers seven days during which most retail, cafes, bars etc. were forced to close and also
covers four days after the social distancing restrictions announced by the Prime Minister on 23 March.
The IHS Markit/CIPS Final UK Services PMI activity registered 34.5 in March, below the earlier 'flash'
estimate of 35.7 for March published last week. This exceeded the previous record low seen at the
height of the global financial crisis and signalled the fastest downturn in service sector output since the
survey began in July 1996. Sharp reductions in activity across most areas of the sector were reported
during March with technology services the only subcategory recording growth. A number of firms noted
that existing projects had been placed on hold and new enquires from abroad had virtually ceased.
2
New work for services also fell sharply and the rate of decline was also much sharper than the previous
record seen in November 2008 whilst new business from abroad fell at an even faster pace than that
signalled for total orders during March, reflecting international travel restrictions and widespread
business closures across Europe. Unsurprisingly, business expectations for the next 12 months fell to its
lowest level on record and survey respondents overwhelmingly cited not only the extent of the impacts
of the global pandemic but also the high level of uncertainty about the likely length of disruption to
business operations. In addition, it would be expected that services activity will fall further in April after
an entire month affected by the closure of many retail, cafes, bars etc. and the social distancing
restrictions. Given that the services sector dominates the UK economy, accounting for 80% of UK GDP,
the impact of the decline in services on UK economic activity will have a considerable impact on the
extent of length of the UK recession.
The IHS Markit/CIPS PMI for UK Manufacturing fell to 47.8 in March, down from 51.7 in February and
marginally below last week’s flash estimate for March of 48.0. The fall in UK manufacturing output was
the largest since July 2012. The downturns in output and new orders were widespread, with
contractions seen across the consumer, intermediate and investment goods sub-industries.
Manufacturers reported that disruption resulting from the COVID-19 (coronavirus) outbreak, lower
market confidence and company shutdowns had all contributed to the drops in production and new
business. Business sentiment was also affected, falling to a series-record low. The decline in activity and
new orders was due to both domestic and export demand. It is expected that manufacturing activity will
decline considerably faster in April after a full month in which domestic demand is affected by the social
distancing restrictions and export demand is affected by the increased spread of the pandemic.
3
The IHS Markit/CIPS UK Construction PMI for March published on 6 April was 39.3 compared with 52.6
in February, its steepest fall since April 2009. The housing PMI fell in March, only to 46.6 as activity was
high until social distancing restrictions on 23 March after which most house builders closed sites so the
largest falls will be in April. The commercial PMI fell to 35.7 in March due to the sharp fall in business
and in-store retail. Plus, it is difficult to justify commercial construction as 'essential' given rising
concerns over social distancing. The civil engineering PMI fell to 34.4, the sharpest fall across sectors.
Early preliminary works across all sectors have been affected due to a reluctance to start new work in
March after previous projects finished and sharper falls are expected in April. Infrastructure has been
affected by TfL and Crossrail doing essential maintenance only after the Mayor of London’s statements
regarding concern over social distancing when both travelling to work on public transport and on site.
On 23 April, IHS Markit/CIPS published flash estimates for activity in Services and Manufacturing in April
compiled between 7 and 21 April.
The UK Services PMI fell to 12.3 in April from 34.5 in March, the sharpest reduction in service sector
activity since the survey began in 1996 and in line with indices in other key European countries affected
by COVID-19. Customer-facing service providers reported a complete shutdown of business operations
in April whilst many other respondents stated that they had weaker demand due to closures from
clients. Unsurprisingly, the sharpest falls in April were in hotels, restaurants and other consumer-facing
businesses. The least marked downturn was seen in financial services. However, it is worth noting that
the Services PMI excludes some key sectors that have been badly affected such as retail, which would
imply the services sector has been even more badly affected than the index would indicate.
The IHS Markit/CIPS Flash UK Manufacturing PMI was 32.9 in April, down from 47.8 in March, the
lowest since this survey began in January 1992. However, the fall in the Manufacturing PMI was softened
by a modest reduction in stocks of purchases and a lengthening of suppliers' delivery times. Goods
producers reported shutdowns or reduced production capacity, as well as cancelled orders. The
sharpest drop in output was registered in the textiles & clothing sector, largely reflecting collapsed
demand from the retail sector although the transport sector, including car production, also reported a
steep decline. The minority of manufacturers reporting output growth in April were mainly involved in
medical supply chains or food & drink.
4
The IHS Markit/CIPS Flash UK Composite Output Index was at 12.9 in April, down from 36.0 in March,
indicating that the combined decline in manufacturing and services was considerably worse than the 38.1
experienced at the height of the financial crisis in 2008/09. 81% of UK service providers and 75% of
manufacturing companies reported a fall in business activity during April. Based on history, this would
correlate to more than a 6% contraction in Q2 GDP. However, it is worth noting that as these PMI
exclude some key sectors such as retail, it is still too optimistic an assessment of the UK economic
shock currently underway. This is especially the case given that the index measures the number of firms
reporting declines in activity rather than the extent of declines in activity by firm.
The largest impacts from government restrictions on the UK economy will be due to:
• Schools closing (from Friday 20 March except for key workers)
• If London is placed under a full lockdown. In countries where lockdowns have occurred, people
have been restricted to their homes and only been permitted to leave to buy food, visit a
pharmacy or go to their job if they are unable to work from home
5
Policy Maker Responses
Bank of England – 11 March 2020:
1) Lowered interest rates to 0.25%
2) Near-term funding scheme allowing banks to borrow at similar rates to the Bank of England for
up to 4 years with additional incentives to encourage lending to SMEs
3) Reduced the countercyclical buffer that UK banks need in reserve from 1% to 0%
Bank of England – 19 March 2020:
1) Lowered interest rates to 0.1%
2) Increase purchases of Government bonds by £200 billion
Expected Response: Reduce interest rates to 0.0% and raise Quantitative Easing (QE). However,
interest rates cuts and improving lending facilities are unlikely to help small firms much given that a lack
of funding for banks is not the key issue. Rather, it is a sharp fall in demand and banks are unlikely to
extend lending to SMEs that are enduring a sharp fall in revenue that may last for 2-3 months at least.
Government – 11 March 2020:
• Extensions to statutory sick pay including refunds for two weeks per employee for firms with
fewer than 250 employees
• Relief on (and for some firms eliminating) business rates for one year for small firms
• Increasing grant funding for small firms
• Expanding ‘time to pay’ to allow firms to delay tax payments
• Introduction of a ‘Coronavirus Business Interruption Loan Scheme’ giving lenders guarantees of
up to 80% on business loans up to £1.2 million
Government – 17 March 2020:
• £330 billion loan guarantees (not grants) for firms
• Grants of £25,000 for retail, hospitality and leisure businesses
• Delaying the introduction of IR35 for one year, until April 2021
• Three month mortgage holiday for homeowners
Government – 20 March 2020:
• Coronavirus Job Retention Scheme – HMRC can reimburse 80% of wages for ‘furloughed’
workers (and firms can top this up by 20% to ensure no wage loss) up to a cap of £2,500 per
month for employees that would otherwise be laid off. Open for claims from 20 April here
• Deferring VAT payments for 2020 Q2
• Suspending the minimum income floor so self-employed person can access Universal Credit at a
rate equivalent to Statutory Sick Pay for employees
Government – 26 March 2020:
• Scheme to help self-employed people; a grant worth 80% of their profits up to a cap of £2,500
per month. HMRC will use the average profits from tax returns in 2016-17, 2017-18 and 2018-
19 to calculate the size of the grant for those who have profits of less than £50,000 p.a.. It will
be available from the beginning of June initially for three months
6
Government – 3 April 2020:
• Coronavirus Large Business Interruption Loan Scheme (CLBILS): This is a scheme to help
medium-sized firms that fell in between the gap of previous announced policies that helped
either large firms or SMEs. Government will provide a guarantee of 80% to enable banks to
make loans of up to £25 million to firms that have an annual turnover of between £45 million
and £500 million
Government – 17 April 2020:
• Extension of the Coronavirus Job Retention Scheme until at least the end of June 2020: HMRC
can reimburse 80% of wages for ‘furloughed’ workers (which firms can choose to top up by 20%
to ensure no loss in wage) up to a cap of £2,500 per month for employees that would otherwise
have been laid off
The success of the government policies such as the loans guarantees and grants will be dependent on
the detail of how focused the policies are on firms in need, the measurement criteria for assessing firms
in need and the speed of getting loans and grants through to eligible firms given the volume of admin
involved. These issues occurred with loan guarantees in 2008 as the financial crisis unfolded but this is a
far quicker shock. There is also concern regarding the lack of flexibility in furloughing workers. The
minimum period for workers on furlough is currently three weeks and flexibility may be needed to plan
for when demand returns or risk becoming a hindrance to recovery if demand recovers quickly as social
distancing restrictions ease. The government has provided a factsheet to help individuals and small firms
but the majority of small firms and those who are self-employed or on temporary contracts may not be
aware of the assistance or the admin resource required. Small firms dependent on cash flow and with
few assets may not have this time available.
On 2 April, the FMB reported the results of a survey of 579 small builders conducted this week on their
experience of the Coronavirus Business Interruption Loan Scheme. It highlighted that:
• 50% of those who had applied for a loan found the process difficult
• 10% of those who had applied for a loan have been rejected whilst 84% were still waiting to
hear back from their bank
• 29% of SME house builders believe they are not able to apply for a loan through the scheme
• Local builders had been asked for a personal guarantee on application or being forced to take
out an overdraft at a high interest rate
The Chancellor stated on 3 April that lenders would not be allowed to request personal guarantees for
loans under £250,000 although personal guarantees continue to be allowed for loans above £250,000.
However, as of 7 April, at least one lender has pulled out of the loan scheme as a result and the
indications are that it may have hindered other lenders’ willingness to lend under the scheme. On 15
April, UK Finance, the trade association representing the banking and finance industry, reported that
only 6,020 loans have been provided through the Coronavirus Business Interruption Loan Scheme,
which was announced on 11 March. There is a high degree of concern that SMEs cannot access finance
quickly enough given demand and revenue have fallen sharply in addition to uncertainty regarding taking
on a loan for an indefinite period of time given no guarantee if and when demand and revenue will
increase.
The assistance for self-employment covers 95% of those who earn income as self-employed workers
and covers most construction trades but it is concerning that the scheme will not begin until June given
the number of self-employed workers have already suffered a sharp drop in revenue already in March.
7
Impacts of Coronavirus on Demand and Supply by UK Sector
The negative impacts on the UK economy are likely to occur across most sectors. Demands on the
health sector are increasing whilst supply restrictions and shortages of inputs have pushed up input costs
although lower oil prices have helped to reduce energy and transportation costs.
Resilience by UK Sector
Professional services are largely able to work from home but this is not an option for most workers in
other sectors except for management level and above. Where staff are employed on temporary or
zero-hours contracts, sectors can reduce their staffing costs whilst demand is falling but in many cases
temporary employees are a small proportion of costs. Assuming that the impacts of the coronavirus are
temporary, affecting primarily 2020 H1, once a recovery gets underway in 2020 H2, industrial
production and wholesale trade may be able to catch up some lost ground and some non-essential retail
trade that was postponed will return but a significant proportion of the activity may have just been
pushed back. In addition, consumer confidence may take time to recover, especially for big-ticket items
and as savings may have been used to sustain regular spending. In the construction and health sectors,
supply capacity will limit how much of the pent-up demand can be met during recovery.
8
UK Forecasts
At the time of writing, macroeconomic forecasters still assume a ‘V’ shaped recession; a decline in
economic activity during Q1 and, in particular, a sharp fall in activity during Q2 whilst economic activity
recovers in the second half of 2020.
On 16 April, HM Treasury published recent UK macroeconomic forecasts across City and non-City
forecasters. Some forecasts were before social distancing restrictions on 23 March so should be treated
with caution. The main forecasts determined after social distancing restrictions are illustrated below.
Of the main City and non-City macroeconomic forecasters, the average (median) estimates for Q2 GDP
is -14% but forecasts range from JP Morgan’s -7.5%, the most optimistic estimate, to Capital Economics's
-24%, the most pessimistic forecast, which suggests that almost one quarter of UK economic activity will
be lost. For comparison, the Office for Budget Responsibility’s coronavirus scenario is also included.
Over half of the macroeconomic forecasts for Q2 GDP are between -13% and -15%.
Overall for 2020, the most optimistic forecaster estimates GDP falling by just 3.6% whilst the most
pessimist forecaster anticipates falling by 12%. Over half of the forecasters estimate UK GDP in 2020
falling by less than 7% but the average (median) fall is 7.4%.
9The OBR Coronavirus Scenario estimates a considerably greater fall than any of the main forecasters,
more than 10 percentage points worse than the second most pessimistic scenario. The OBR states that
this scenario is only an illustrative reference point given the lack of data and precedents for the current
situation and assumes that the social distancing restrictions announced on March 23 last for three
months and are then gradually lifted during the third quarter although many forecasters (including the
CPA) have assumed that the social distancing restrictions begin to be eased in May to enable economic
recovery to start in June. The OBR assumptions imply a drop in UK GDP of around 35% in Q2 and
unemployment rising from below 4% to 10% during Q2.
However, the OBR anticipates that UK GDP rises by 27% in Q3 & 21% in Q4 so that UK GDP returns
to its pre-COVID-19 (coronavirus) level by Q4 in spite of higher unemployment and consequent lower
household spending when the worst affected sector has been services, which is dependent on
consumption. The profile of the recovery appears far too optimistic given that the rise in unemployment
and reduction in wealth means that household spending is likely to take time to recover. In addition,
capacity constraints from supply chains, particularly SMEs could also hinder recovery.
10The CPA will be revising its scenarios as more data and forecasts are published but at the point of
writing (17 April) the CPA’s main UK macroeconomic scenario is based on the assumption of a ‘tick-
shaped’ recession with a sharp decline in March and Q2 but a slower recovery. It assumes that
coronavirus effects start to dissipate in May and social distancing restrictions to be eased gradually from
June, to enable economic recovery to begin in Q3. The scenario suggests that GDP may fall by over 12%
from peak to trough, a revision downward from the 10% fall in the CPA’s previous scenario. The
estimated 12% fall in GDP during the first half of 2020 is due to a 1.4% fall in Q1 and a fall of 11.1% in
Q2. The CPA macroeconomic scenario is within the range of most UK macroeconomic forecasters.
The easing of social distancing restrictions is likely to be gradual as government is initially likely to be
risk averse so the third quarter of the year sees the start of recovery in areas of the economy that do
not involve large gatherings of people or international travel. Recovery from the Q2 low base may be
initially rapid in Q3 and early Q4, assisted by government stimulus, but is unlikely to be sufficient to
offset the sharp falls in the first half of the year. The CPA scenario implies that UK GDP may fall by 8%
in 2020 overall, a larger fall than the 6% fall experienced during the financial crisis of 2008/09 and in a
considerably shorter time period. During the financial crisis, the UK economy experienced a 6% fall in
five quarters whereas on this occasion the estimated 12% fall is expected in just four months. Towards
the end of 2020, growth rates are expected to slow due to risk aversion and a lack of finance for
households and businesses that constrain spending and investment. Medium-term, the scale of the
coronavirus may have economic, financial and political effects long-term with government focusing on
rebuilding services, manufacturing and the health service whilst private sector focuses on risk aversion,
reducing costs and diversifying supply chains. GDP is only expected to return to levels seen before
coronavirus impacts towards the end of 2022. The profile of the scenario appears to be in line with the
majority of forecasters although it is clearly considerably different to the OBR’s scenario.
11UK Economic Impacts: Households
• Stockpiling impact boosts short-term sales of a few general retail items
• Confidence shock leads to a sharp decline in footfall for services as well as purchases of non-
essential items and big-ticket purchases
• Rise in saving due to increased risk and uncertainty
• Best case scenario: primary impact on spending in Q1 & Q2 before spending growth in H2
• Worst case scenario: sharp rise in unemployment and real wage falls in 2020 and 2021
UK Economic Impacts: Financial Markets
• Share price falls impact corporate balance sheets and firms focus on cash and reducing costs
• Less liquidity in the markets leads to tighter lending conditions
• Rise in the difference between lending rates and Bank of England interest rate
• Best case scenario: share prices fall in March and April before the impacts of policy intervention
lead to a stabilisation during Q2 and a recovery in balance sheets in line with growth from Q3
• Worst case scenario: panic from global financial markets heightens and leads to financial crisis
UK Economic Impacts: Private Sector
• Lower company revenues due to slower household spending
• Lower corporate profits; fixed costs are maintained whilst additional contingency costs rise
• Cash flow problems for smaller firms and increase in administrations and liquidations
• Best case scenario: smaller firms’ cash flow is badly affected during H1 although this is partially
mitigated by early policy intervention to stimulate lending and bridge the cash flow gap
• Worst case scenario: panic from the financial markets constrains lending to the extent that
there is a sharp increase in small and medium-sized firms going into administration and
liquidation as policy maker interventions are insufficient or take time to have an impact
Construction
There continues to be concern regarding on site workers. The Construction Leadership Council
published the third version of the Site Operating Procedures on 15 April 2020 and states that people on
site are allowed to work at distances of less than 2 metres on site within certain conditions. However,
as ever, the key issue remains whether contractors adhere to these in practice.
Following the social distancing restrictions from 23 March, there still remains confusion in the industry
as to what activity may occur. The Scottish First Minister stated on 23 March that ‘building sites should
close’ and firms report that construction activity has slowed considerably in Scotland. The Mayor of
London stated on 24 March that TfL and Crossrail have stopped construction activity except for basic
maintenance and repairs. He also stated new work should not occur given that a significant proportion
of workers will be travelling to work on crowded public transport. However, both Michael Gove and
Robert Jenrick, Secretary of State for Housing, Communities and Local Government, have publicly
stated that construction on site should continue ‘where it is safe to do so’. Initially, following the social
distancing restrictions on 23 March, there were incidents of police stopping construction activity and
deliveries to site. Many builders merchants remain closed whist others are currently open with
restrictions under Public Health England guidance including social distancing and many other merchants
are restricting sales operations; reduced numbers of branches and only operating for deliveries. The
Builders Merchants Federation has a list of the status of the different merchants. As of 20 April, 15% of
merchants are open, 46% are partially open whilst 39% remain closed.
12The latest data on construction output from the ONS, published on 9 April, show that construction
output in February 2020 was 1.7% lower than in January and 2.7% lower than a year earlier even before
the impacts of coronavirus on activity, which occurred after social distancing restrictions were
announced on 23 March. The fall in construction activity during February was mainly due to the
persistent rain (February 2020 was the wettest February since 1862), making it difficult to get on site
and work. As a result, new work fell by 3.4% whilst repair and maintenance activity overall rose by 1.7%.
Within new work, the largest falls in construction activity during February were in private housing,
which fell by 7.7% compared with January and 9.3% compared with February 2019. Private house
building has also been the most affected since the social distancing restrictions on 23 March and,
consequently, private housing output will be expected to fall further in March and especially in April.
In March 2020, 32 construction companies fell into administration, the same number as in February but
higher than the 22 construction companies entering administration in January. Construction activity
carried on throughout most of March and sub-contractors were getting paid for work already done in
previous months. The initial rise in administrations is likely to be in April although largest rises are likely
to be in May and June as sub-contractors suffer from the both a fall in demand and main contractors
push out payment terms as they deal with declines in activity.
On 22 April, the ONS reported that, even before the key impacts of the coronavirus, UK house prices
in February fell by 0.6% compared with January and prices fell in 8 of the 11 regions and nations. UK
house prices in February were 1.1% higher than one year earlier. It is worth noting that London house
prices rose by 0.2% in February compared with January but were 2.3% higher than one year earlier.
13Many house builders closed on 24 March or announced their intention to closed sales offices, show
homes and sites yet Berkeley stated on 27 March that some sites remain open whilst other sites will be
closing due to ‘increasingly considerable challenges in maintaining the delivery of materials to site’.
On 9 April, Redrow stated it had furloughed over 1,800 staff, 80% of its workforce and secured a £300
million loan from the Bank of England’s Covid Corporate Financing Facility (CCFF) whilst MJ Gleeson,
said it had furloughed three quarters of its employees, more than 450 staff. On 14 April, Barratt, stated
that it would furlough a large proportion of its employees. Crest Nicholson stated it had furloughed 74%
of its workforce, around 750 employees. On 16 April, Barratt stated it will furlough 85% of its 6,000
employees until at least the end of May and although main works on all sites finished by 27 March, work
continued finishing homes on some sites leading to1,349 completions between 23 March and 12 April.
On 23 April, Taylor Wimpey reported that it would restart on sites from the week of 4 May in England
and Wales but sales centres, show homes and regional offices would remain closed until social distancing
restrictions on non-essential retail are eased. Plus, sites in Scotland will remain closed until Scottish
Government guidance changes. It also stated that completions in the 16 weeks to 19 April were 14%
lower than a year earlier due to site closures. In addition, Vistry Group stated on 23 April that it would
restart work on a significant number sites and 90% of joint ventures from 27th April with focus on
homes ‘where we have clear visibility of completion and hence cash realisation’. It also furloughed the
majority of its staff. On 24 April, Persimmon reported that whilst construction work had been
continuing in limited instances to complete homes, it was planning a phased restart to work on site from
27 April. Other major house builders are also looking to return in the next 2-3 weeks and although it
may be that this reflects activity on partially completed developments, the main concern from a market
perspective remains where the demand will come from after this initial work. This is especially the case
given that, even if social distancing restrictions start to be eased from mid-May, they are likely to be
eased slowly and focus on either on essential services, such as schools, and the hardest hit parts of the
economy, such as general retailers. Spending, particularly on big-ticket items, is likely to be adversely
affected in the medium-term given a considerable rise in unemployment, risk averse consumers and an
increased propensity to save.
On 26 March, Zoopla reported a 40% fall in demand in the week before social distancing restrictions on
23 March. Zoopla forecasts sales will fall by 60% in the next 3 months, which is still optimistic given the
housing market has zero activity as viewings and valuations cannot take place and Robert Jenrick clarified
home moves should be delayed. Also, lenders have withdrawn mortgages above 60% LTV due to
constrained resources and the inability of surveys and valuations to take place. Foxtons reported on 17
April it assumes revenues will fall 78% in 2020 Q2 and Q3 whilst it had furloughed 750 staff, employees
on over £40,000 per year have a 20% pay cut and it will issue 20% more shares to raise finance.
One consequence of the lack of transactions is that house prices indices (based on the price of
transacted homes) are unlikely to fall considerably in spite of the sharp fall in demand as there are
unlikely to be sufficient transactions to determine house price indices. It is only likely that the UK
housing market starts to recover from June and even then it may be that potential purchasers and
lenders are highly risk averse after the shock. Given the housing demand shock and lack of house
building, it would be expected that the government extends the current unconstrained Help to Buy
beyond March 2021 to stimulate the housing market. In addition, housing associations may also need
additional policy help (dependent on the detail of the next Affordable Housing Programme) given
housing associations’ rising dependence on private sales to help fund affordable housing provision. The
key problem with the sharp fall in housing demand will be for the supply chain. The top 10 UK house
builders employ only one person for every three homes they build on average so activity and risk are
sub-contracted out to SMEs that are reliant on cash flow and, in particular, the 41% of construction
workers that are self-employed.
14SMEs will not only be affected by the shutdown in new housing but also on housing rm&i. On 26 March,
the FMB survey of small builders reported 60% of small builders have already ceased between 76% &
100% of their work. Of those, 80% are doing residential repair, renovation & maintenance work that
may have issues of access to homes as owners may be concerned about social distancing issues.
Further issues will arise in construction more generally either if/when the government stronger social
distancing restrictions that impact on construction or if/when someone tests positive on a high-profile
site that has to shut down. Then, a domino effect may cause other sites to also shut.
At this point, London has not been put into a full lockdown as seen in key coronavirus hotspots in
Europe, most recently in Ireland on Friday 27 March in which only essential maintenance is permitted
and most new work does not occur. Furthermore, it increasingly appears unlikely that it will be.
However, if it were to occur, the government list of key workers states activity should continue where
“work is critical to the COVID-19 response”, including maintaining infrastructure and public buildings. It
does mention housing repair and maintenance but it may be covered within “workers delivering key
frontline services”. On 27 March, the Ministry of Housing, Communities and Local Government stated
that staff undertaking roles providing vital public safety functions to keep homes safe may be classified as
critical. It currently appears to exclude new build.
The Scottish First Minister’s comments in March that sites should close and the Scottish Government
guidance on 6 April implies that construction work should not go ahead except for health facilities,
repurposing of existing facilities for coronavirus-related activities, essential repairs work on private
buildings (but not routine maintenance) and the repair and maintenance of infrastructure (but not
improvements). In practice, this implies that around 85% of activity may not occur and if this is applied
for 3 months then it would lead to a loss of around £2.5 billion of activity in Scotland.
The Construction Industry Coronavirus (CICV) Forum survey of 377 companies across the supply chain
in Scotland reported on 16 April that two-thirds of all firms that took part in the survey had furloughed
staff, over one-third had shut completely, whilst more than one-quarter currently had staff and sub-
contractors in self-isolation. Key survey results:
• 79% of respondents stated cashflow had stopped
• 68% of respondents had furloughed staff
• 37% of firms had closed
• 54% of firms were carrying out emergency work only
• 56% of firms had overdue invoices that were sent directly to public sector clients
• 55% of firms had overdue invoices that were sent directly to private sector clients
• 26% of firms had staff and sub-contractors who are currently self-isolating
• 33% of firms stated they are finding it difficult to source appropriate materials
15In March, the CPA was anticipating that new work in London may be the next region affected given
concerns raised by the Mayor. Interserve London stopped activity due to concerns over workers
travelling on crowded public transport and Ardmore Group also suspended operations. On 1 April the
Battersea Power Station Development Company stated that work has stopped and will not restart until
27 April at the earliest. However, on 14 April, HS2 stated that Network Rail will restart work at Euston
station from 20 April and on 15 April government issued the formal Notice to Proceed on HS2 for the
four consortia that originally won work packages in 2017. Sir Robert MacAlpine stated on 25th March
that most of its sites were closed or closing except where critical work such as building hospitals
continues. On 22 April, Sir Robert McAlpine restarted work on a small number of sites in a very limited
capacity in spite of announcing on 6 April that it was furloughing half of its 2,000 employees. On 2 April,
Wates reported that it would be furloughing 1,000 employees, Morgan Sindall furloughed approximately
1,000 employees and Laing O’Rourke announced on 1 April that staff wage cuts of between 20% and
30% and on 8 April stated 1,000 staff would be furloughed. It also said it is trying to keep sites open but
work on Tideway, Crossrail and Northern line extension is suspended. On 3 April, after shutting down
its London sites, Mace stated furloughed 800 employees but on 6 April Mace announced that ‘some of
its UK sites’ would reopen on 7 April. On 21 April Mace stated it expects 30 sites, one-third of its total
number of sites, to open by 24 April. Lendlease stated on 2 April that its sites in London, including the
£1 billion Google headquarters at the King’s Cross redevelopment, are suspended “near term”. On 23
April, Lendlease reported limited work at some sites is restarting but the Google headquarters project
in King’s Cross remains closed. BAM Construct stated on 3 April that it will reopen its 7 London sites
on 6 April including the £200 million Facebook headquarters in the King’s Cross redevelopment yet on
8 April it also announced furloughing 440 staff. On 8 April, Keltbray stated it was furloughing one-third
of its employees and applying salary reductions for at least two months for staff earning above £50,000
per year. On 3 April, Henry Boot reported it had closed all sales centres and paused construction
except work vital to the NHS. It also stated it would furlough employees. On 21 April, Nexus
Infrastructure stated that it had furloughed 87% of its workforce due to closed sites with employees
taking wage cuts of 50% above earnings of £30,000 per year. Of its divisions, Tamdown has furloughed
97% of its employees due to major house builders closing sites, TriConnex has furloughed 74% of its
staff on utility services whilst eSmart Networks furloughed 53% of its staff on smart energy
infrastructure schemes. On 8 April, Willmott Dixon announced it was furloughing 800 of its 2,200 staff
but 90% of its sites remain open. On 3 April, Multiplex announced that it would furlough one-fifth of its
employees and remaining staff have a 20% salary cut. Multiplex stated on 16 April that it restarted
‘limited’ works at 3 residential sites in London and the city’s tallest tower at 22 Bishopsgate. On 20
April, Bouygues UK stated that, after closing sites except for healthcare works on 25 March, it will phase
opening of some sites and would operate at reduced capacity in the next few weeks.
In terms of the impacts on output, the CPA is currently working on its construction scenarios.
Construction activity has historically had a strong correlation with UK economic growth but has tended
to be three times more volatile. As a result, an 8% fall in UK GDP during 2020 would generally imply a
fall of around 24% in construction output although this will clearly vary considerably by sector.
The nature of the current contraction is that it has been different to past recessions in that economic
activity has declined at a more rapid rate and is expected to last for a shorter period than previous
recessions. In addition, even where construction activity is continuing, the indications are that
productivity on sites that are adhering to social distancing measures has fallen by more than 30%. The
key issue for construction is that 86% of employment is in SMEs and 41% is self-employment so the
majority of business models are based almost entirely on cash flow and few assets. This means a sharp
fall in demand would lead to a sharp rise in unemployment, administrations and liquidations, particularly
following on from the slowdown in construction activity at the end of 2019.
16The indications that the CPA has so far is that approximately 60% of construction output in Great
Britain is being lost during the period of the social distancing restrictions (85% in Scotland); 85% of
house building, 60% of non-residential new build, 60% of repairs, maintenance and improvements (the
improvements part of rm&i) and 20% of non-residential r&m. Clearly, the full impacts will only be clear
once it is know how long the social distancing restrictions last and the speed at which they are eased.
The CPA’s initial DRAFT scenario is based on the social distancing restrictions being eased from
approximately mid-May enabling recovering in the UK economy and construction output from June. The
initial draft scenario at this point anticipates construction output in 2020 falling by around 25% with the
largest falls in activity in private housing (-43%), commercial (-35.6%) and private housing rm&i (-35.4%).
Anecdotally, there are strong indications that many main contractors have been demanding sub-
contractors come to site or be in breach of contract as well as main contractors increasingly retaining
retentions and extending payment terms for the supply chain. The negative impact of declining activity is
likely to have been felt since the social distancing restrictions on 23 March but many smaller firms will
still have been paid after that for previous work. The negative impacts of both declining activity and
delayed payments on the activity since 23 March is likely to be felt by SMEs primarily in May and June. In
addition, there are also rising concerns that, as in previous recessions, an increase in administrations and
insolvencies may lead to difficulties in trade-credit insurance, meaning that firms would have to pay
suppliers up front, leading to further cash flow issues for SMEs.
The problems for small and medium-sized contractors are clearly highlighted in the Federation of Master
Builders (FMB) survey published on 17 April. Almost two thirds (65%) of small building companies stated
that they would not be able to last more than two months without grants from the government whilst
the government announcements of loans under the Coronavirus Business Interruption Loan Scheme
(CBILS) announced over four weeks ago are not coming through. Key results include:
• 68% of builders have stopped at least 91% of operations and new enquiries dropped by 64%
• Of stopped work, 80% say this is due to the availability of products and materials; 65%
experienced problems maintaining social distancing rules on often small, domestic sites
• Only 4% of builders who have applied for the CBILS have been successful. 86% are still
waiting to hear from their bank, with 44% waiting more than 10 days
• 69% of directors of small limited companies said 80% of their monthly PAYE salary (available
through the Coronavirus Job Retention Scheme) would not provide enough support during
lockdown, as most of their income comes from dividends which isn’t covered by the scheme
• 65% of builders say their business can survive for two months in the current circumstances,
with almost a quarter (23%) saying that they will struggle to even get through four weeks
17The concerns over impacts on construction have been reflected in share price falls across the supply
chain. Major house builder share prices have fallen 39% between peak and close of play on 23 April. It is
worth noting that in the week during which most house builders closed sites share prices rose,
indicating that markets had already priced in major house builders shutting down their sites. It is also
worth noting that the lowest share price falls have been for Berkeley Homes, which is one of the few
major house builders currently on site.
% Change in Major House Builder Share Price Since Peak
Taylor Crest
Barratt Wimpey Persimmon Berkeley Bellway Redrow Vistry Group Nicholson
0%
-10%
-20%
-21.6%
-30%
-33.6%
-40% -37.4% -38.2%
-41.3%
-45.2%
-50% -47.1%
-50.9%
-60%
-70%
-80% Source: London Stock Exchange
Major contractors have suffered sharp share prices falls from peak. The largest falls between peak and
close of play on 23 April have been at firms that have internal issues, Kier (-94%) and Costain (-84%),
although it is worth noting that both Kier Infrastructure and Costain are on consortia that have HS2
work packages so benefit from government issuing the Notice to Proceed on 15 April and both share
price have risen since 15 April. In particular, Costain’s share price rose by 65% on the day itself.
Galliford Try stated on 31 March that it will be furloughing personnel and stopping activity on projects
on which the CLC’s site operating procedures cannot be adhered to. Kier announced on 30 March that
it intends to keep sites open but that its employees would have a cut in salaries and fees of between
7.5% and 25% for 3 months. Costain reported on 31 March that work will continue in areas that provide
50% of its revenue such as strategic highways, councils and water firms but Crossrail, HS2 Enabling
Works and Thames Tideway contracts has been paused, accounting for 30% of its revenue. It also stated
that it would reduce costs, defer capital expenditure, defer PAYE and VAT payments and furlough the
affected workforce.
% Change in Major Contractor Share Price Since Peak
Kier Galliford Try Balfour Beatty Morgan Sindall VINCI Costain
0%
-10%
-20%
-22.2%
-30%
-33.5%
-40% -36.6% -36.9%
-50%
-60%
-70%
-80%
-83.7%
-90%
-100% -94.3%
Source: London Stock Exchange
18Construction Impacts: Supply Issues
Products: Some contractors have reported difficulty getting materials and products. As of 17 April, most
major manufacturers were still operating. Even where production largely stopped e.g. bricks, there are
around 400 million bricks in stock and some manufacturers have started to reopen (e.g. Michelmersh on
21 April) so production may not be the key issue. If there is a supply issue currently, it may be
contractors have difficulty co-ordinating all products delivery on site at the right time due to:
• SME purchasing hindered as some merchants are closed and many are only doing deliveries
• Cases of police preventing deliveries due to concerns over social distancing
• Main contractors may be enforcing social distancing measures on the supply chain that make
it difficult to make large deliveries that require many people
• Some imported products may be an issue from China and key European countries
Only one-quarter of construction products used in UK construction are imported.
16% of these imports are directly from China but the indirect impacts will be greater as, firstly, many
UK construction products imports go via Europe’s largest port in Rotterdam (Netherlands is 5th in the
chart) and, secondly, UK imports from other countries may also rely on China for materials.
The direct imports from China are primarily paints & varnishes, electrical wiring, HVAC, ironmongery,
plywood & lino. Shipping (and admin) times from China are generally between 28 and 42 days so impacts
on supply chains since February are likely to impact from the end of March.
6% of the UK’s imports of construction products come from Italy and 5% of the UK’s imports of
construction products come from Spain. Impacts from delays due to production and export issues from
EU countries may also have an impact from the second half of March after lockdowns in many countries.
Anecdotally, there have been reports of delays on imports of plywood from China, cladding and
components from Europe; Italy, Spain and Denmark highlighted.
18%
UK Construction Products Imports by Country
16%
14%
% of UK Construction Products Imports
12%
10%
8%
6%
4%
2%
0%
CHINA GERMANY ITALY SPAIN NETHERLANDS DENMARK TURKEY BELGIUM IRISH REPUBLIC U.S.A. POLAND
Source: BEIS
19Even prior to the impacts of the coronavirus, over 50% of contractors were already reporting difficulties
recruiting key trades, site managers, planners and engineers. A key issue when construction activity
recovers is likely to be labour. Materials and products can be generally be imported during periods of
significant changes in demand and this has tended to occur following previous recessions and consequent
factory closures. Materials and products imports as a proportion of construction output tend to fall
during recessions as imports are not necessary given an excess of domestic production and price falls
whilst the lack of domestic capacity means that imports are necessary in the initial stages of recovery
before investment in domestic capacity to reopen mothballed and closed factories occurs.
Construction labour potentially raises major problems for the industry when it recovers, particularly in
London where there is a particular reliance on non-UK labour. According to the HBF census of its
member construction sites (see below), 56% of site labour in London is from outside the UK and 49% is
from the EU. At this point it is difficult to ascertain whether skilled labour will be as willing to come
over the to the UK and, if not, what impact this would have on hindering recovery after the fall in
demand, raising labour cost inflation and delaying project progress.
20You can also read
