We sat down with Tom Hall, Chief Economist at Barbour ABI in light of our February Content Calendar theme: Economics in construction. Read on to find out how the economic trends will play out in 2022.
People may not have any clue as to why construction plays such a large role in the nation’s economy. Why does it have such an effect on GDP and beyond, compared to other industries?
Construction accounts for around 10% of GDP, overall. New work is around 6%, with repair, maintenance and improvement (RMI) work taking up roughly 4%. For comparison the service sectors’ contribution to GDP is approximately 75%. However investment in construction is critical to the overall health of the economy and to the continued success of the service sectors. A healthy built environment means a healthy population, who then in turn can work and spend money to produce high levels of GDP. Construction is right at the core of this success.
The built environment often lasts hundreds of years, even if we don’t expect it to. So, the decisions we make now will be impactful for our and our descendents’ lifetimes. Therefore, if we make the right decisions today then we give ourselves the best chance of having a strong economy in the future. You solve many wider issues by investing in the built environment. Strong investment translates across the long term into improved levels of education, healthcare and network connectivity, as well as happier people, which all mean that the public can get to work quicker and easier and be more productive. This will then lead to further investment and creates a virtuous cycle for the service industries and beyond to thrive.
Do you think construction businesses currently focus enough on wider factors? Why should national construction businesses focus more on wider economic factors when considering their strategy?
There are a wide range of approaches taken to planning within the construction and manufacturing industries. In a world of uncertainty, understanding what can happen in as many of the future scenarios that are possible becomes very important. In the past you may have gotten away with thinking “we’ve done this before, this is our approach, we’ll be fine”. But more uncertainty equals more risk, and if you don’t understand what could happen in the future, how can you make good decisions? And with the prevalence of data and technology now, access to the insight needed to make good decisions is more accessible than ever before.
In terms of wider economic factors, it’s always useful to try to understand the drivers behind what we’re seeing. So, for instance, warehouse construction has been booming recently, but do you know any of the factors behind why this may be occurring? How can you know whether the boom is likely to continue if you don’t know why it’s happening? Is the online shopping revolution going to continue? Will the difficulties manufacturers are experiencing post-Brexit and post-COVID continue? Those are some of the factors driving the boom in warehousing. So, if you know those factors, you can make a much more informed decision on whether you think the trend will continue, and therefore can plan more successfully.
Similarly, many of the commercially focused construction sectors are highly sensitive to wider economic conditions. For instance, when we see a downturn in the economy and in consumer expectations, housebuilders are very quick to respond to those triggers and ramp down the output of new homes.
And then understanding the political sphere is also key. Infrastructure and public spending are hugely dependant on government investment and the regulatory environment. While commercially sensitive sectors may be more dependent on government subsidies. For instance, the residential sector was recently bolstered by the stamp duty holiday, and needed the government Help to Buy scheme to help it recover after the crash in 2008.
Again, understanding the factors are at play can have a huge impact in whether your decision making will prove to be successful.
Does recent construction and economic activity suggest that the industry has recovered from COVID, or are there still underlying risks to consider?
The construction industry broadly got back to pre-COVID parity in March 2021, which is a massive positive news story, albeit, in different sectors than pre-COVID. Before COVID, the bulk of work was in the residential and commercial sectors, whereas post-COVID infrastructure and repair and maintenance are the main areas of activity. Since then we have seen a gradual improvement in the commercially sensitive sectors, particularly residential and offices. These have improved as the COVID outlook has improved. As stated earlier, the commercially sensitive sectors generally go in line with levels of confidence in the wider economy.
The risks to the construction industry from COVID have receded in recent months. Greater risks moving forward will come from higher taxes and higher consumer, business and government debt: attempts to rapidly de-leverage which will suck demand out of the economy, creating a vicious cycle of falling demand followed by falling supply.
Alongside this there’s the impacts from our hard Brexit to consider, which are likely to intensify as more elements of the agreement are enacted. Customs controls implemented at the beginning of 2022 are likely to intensify as trade ramps up through the year. The introduction of product standards are planned this summer, as well as other regulations arriving across the year. All these things are coming together to act as a major drag on trade. As COVID impacts become less apparent, we will see these factors having a bigger impact on the economy.
Overall the economy is back to where it was before COVID – which is great news, but it would have grown during that time, so we’re still around 3-4% behind where we should have been in terms of GDP at this point.
Are there any major or emerging economic trends that you are curious to see play out across 2022?
There are many different avenues of interest for construction and the wider economy that are worth considering this year: asking whether the boom for offices will continue is one of the big questions in construction. Record levels of warehousing is set to continue. How will production and factories recover this year? Because due to everything that has happened in the past 5 years, the industrial sector has taken a big hit in investment. And with the technological change that is needed for us to reach sustainability goals, eventually we’re going to need to build factories for solar panels, wind turbines, batteries, and massively scale up the home retrofitting that needs to occur.
In terms of wider economic factors, the Bank of England raising interest base rates is highly likely to have a negative impact on consumer spending, as will tax rises. Savings rates have dropped to near pre-covid levels, which would suggest that currently people are spending money, but how long will that continue for, especially in the face of inflation? With our economy being so geared towards consumer spending, as soon as the public tighten their belts, it will be noticeable on the wider economy. It will be interesting to see what impact that has on the housing market.
And finally, will “levelling up” become reality rather than rhetoric? It’s certainly going to be an interesting year with so many uncertainties coming out of the pandemic.