- The construction sector appeared to brush off the English lockdown and other restrictions in November, with the construction PMI rising to 54.7 in November from 53.1 in October. All sectors achieved expansion, led by house building
- Experience has been gained in keeping activity going from the March lockdown. Many construction sites have been adjusted to meet COVID-19 health and safety requirements, and the Government has stressed that it wanted construction to keep operating through the latest lockdown
- November’s survey was largely firmer across the board, boding well for future activity. New business expanded at the fastest rate since October 2014 as the sector benefited from increased tender opportunities, increased client confidence and robust housing market activity. Confidence in future output was at a 10-month high. Employment continued to fall but at a reduced rate
- The resilient overall November set of purchasing managers surveys (for services, manufacturing and construction) point to the impact of the national lockdown in England and other restrictive measures being substantially less than occurred in April and overall in Q2 2020 following the March restrictions
- The surveys indicate manufacturing and construction sectors have managed to keep growing at a decent rate; services activity has been affected, especially in the hospitality and leisure sectors, but the impact overall is markedly less than earlier in the year
- The EY ITEM Club has been expecting GDP contraction of 4% in Q4; but this now looks to be very much on the pessimistic side
- It is very possible that the overall Q4 decline in GDP could be around 2% quarter-on-quarter. The EY ITEM Club forecasts the pick-up in economic activity following the end of the English lockdown on 2 December will be limited as restrictions on activity remain appreciable overall. The EY ITEM Club expects overall GDP contraction just over 11% in 2020
- The EY ITEM Club’s latest forecast sees GDP growth of 6.2% in 2021 as the economy benefits from COVID-19 vaccine developments. The forecast assumes the UK and EU agree a Free Trade Arrangement before 2021
- GDP growth is forecast at 4.3% in 2022 but the economy is not seen regaining its Q4 2019 level until the latter months of 2023
Howard Archer, chief economic advisor to the EY ITEM Club, says:
“The purchasing managers survey showed the construction sector seemingly brushed off the English lockdown and other restrictions in November.
“Experience has been gained in keeping activity going. Many construction sites have been adjusted to meet COVID-19 health and safety requirements, and the Government stressed that it wanted construction to keep operating through the second English lockdown.
“Positively, Markit observed that there were signs that the main growth driver has transitioned from catch-up work to new projects.
“The construction PMI rose to 54.7 in November after dipping to 53.1 in October from 56.8 in September. It had earlier peaked at a 57-month high of 58.1 in July as it benefited from the catching up of work after the restrictions on activity earlier in the year.
“The rise in the construction PMI in November was in contrast to the contraction in construction activity that had occurred after the 23 March lockdown, particularly in April and May. Indeed, the construction PMI reached a record low of just 8.2 in April, down from 39.3 in March and 52.6 in February. The construction PMI was still as low as 29.9 in May before improving to 55.3 in June. Hard data from the Office for National Statistics show construction output fell 41.2% month-on-month in April after a drop of 5.5% in March and contracted 35.7% quarter-on-quarter over the second quarter. It rebounded 41.7% quarter-on-quarter in the third quarter.”
Outlook for UK economy in Q4 2020 and 2021
Howard Archer observes: “Overall, the resilient November set of purchasing managers’ surveys reinforce belief that the impact of the latest national lockdown in England and other restrictive measures will be markedly less than occurred in April and overall in Q2 2020 following the March restrictions.
“The lockdown measures in November were less severe than those introduced on 23 March, and schools being kept open made it easier for people with children to keep working. With schools, colleges and universities all staying open, there will not have been the large decrease in education output that weighed on GDP in the second quarter. Education output contracted 27.6% quarter-on-quarter in the second quarter after a decline of 8.4% in the first quarter.
“People and companies have got used to home working, while some workplaces and offices have been adjusted to meet COVID-19 health and safety requirements.
“There is also evidence of an appreciable lift to manufacturing activity coming from stockbuilding ahead of the UK-EU transition arrangement on 31 December while the Chancellor’s extension of the furlough scheme to the end of March should limit the near-term rise in unemployment and help activity.
“The EY ITEM Club had been expecting GDP contraction of 4% in Q4, but this now looks to be very much on the pessimistic side given the resilient set of November purchasing managers survey – although it is important not to read too much into them.
“Indeed, it is very possible that the overall decline in GDP could be around 2% quarter-on-quarter. Nevertheless, the EY ITEM Club suspects that the pick-up in economic activity following the end of the English lockdown on 2 December will be limited as restrictions on activity remain appreciable overall. The EY ITEM Club expects overall GDP contraction of just over 11% in 2020.”
“The EY ITEM Club’s latest forecast sees GDP growth of 6.2% in 2021 as the economy benefits from COVID-19 vaccine developments. The forecast assumes that the UK and EU will avoid a no-deal outcome at the end of 2020. Even so, there is expected to be some limiting impact on trade and growth in 2021 from the changed relationship with the EU, as the UK will lose access to the Single Market and Customs Union.
“The forecast assumes that a little growth has been pulled into 2021 from 2020 by the national lockdown in England and other restrictions on activity imposed during Q4 2020. The EY ITEM Club also assumes that the Chancellor’s extension of the jobs furlough scheme until the end of March 2021 will have some limiting impact on the rise in unemployment, which will be supportive to economic activity.”
All construction sectors achieved expansion in November
Howard Archer adds: “All construction sectors saw expansion in November, led by house building. Civil engineering grew after three months of contraction.
“House building growth slowed to a five-month low but was still at an elevated level. The housing market has seen a marked pick-up in activity since restrictions were increasingly lifted from May, further helped by the Chancellor temporarily raising the Stamp Duty threshold from mid-July – although there are significant uncertainties remain about its longer-term outlook. Latest data from the Bank of England show mortgage approvals for house purchases were at a more than 13-year high in October.
“Commercial activity grew for a sixth month running but at the slowest rate since May, while civil engineering activity expanded for the first time in four months.”
New business growth strongest since October 2014
Howard Archer continues: “Most elements of the construction survey were stronger in November. It was particularly welcome to see that new business grew at the fastest rate since October 2014, as the sector benefited from increased tender opportunities, increased client confidence and robust housing market activity.
“Confidence in future activity among construction companies rose to a 10-month high in November supported by rising orders and work in the pipeline, although there were uncertainties over the wider economic outlook.
“Employment in the construction sector continued to fall in November, although the rate of decline was the slowest since February.
“Construction activity was hampered by supply chain capacity problems. This led to a lengthening of delivery times for construction products and materials. Additionally, input prices rose at the sharpest rate since April 2019.”