- The purchasing managers indicate that the construction sector held up well in December despite restrictions on activity in many regions.
- The construction PMI only edged down to 54.6 in December from 54.7 in November, with robust housebuilding leading the way. Commercial activity expanded modestly but civil engineering work contracted.
- The December survey was largely decent across the board, boding well for future activity despite the lockdown now in place. New business grew at the second fastest rate (after November) since December 2015. Confidence in future output was the highest since April 2017. Employment edged up for the first time since March 2019.
- The performance of the construction, manufacturing and services sectors in November and December reported by the purchasing managers highlights that the overall impact of the national lockdown in England and other restrictive measures on economic activity in Q4 2020 was markedly less than occurred in April and overall in Q2 2020 following the March restrictions.
- The EY ITEM Club suspects that the UK economy contracted by close to 2% quarter-on-quarter in Q4 2020. This would result in overall GDP contraction of 10.5% in 2020.
- With lockdown back in place and set to last until at least mid-February, the EY ITEM Club expects the economy will have a challenging start to 2021 and will experience clear contraction in Q1 – possibly in the region of 3-4% quarter-on-quarter. This would result in a double dip recession.
- The EY ITEM Club expects the economy to benefit progressively through 2021 from the roll-out of the COVID-19 vaccines. However, the current GDP growth forecast of 6.2% for 2021 is now too optimistic given the updated forecast for Q1 – 5.0% growth may well now be the limit.
Howard Archer, chief economic advisor to the EY ITEM Club, says:
“The purchasing managers survey showed the construction sector held up well in December despite widespread restrictions that followed the ending of the English lockdown at the start of the month. Indeed, the construction sector had previously seemingly largely brushed off the English lockdown.
“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. Markit observed that there were signs that the main growth driver has transitioned from catch-up work to new projects.
“The construction PMI only edged back to 54.6 in December after rising to 54.7 in November from 53.1 in October. It had earlier peaked at a 57-month high of 58.1 in July as it benefitted from the catching up of work from that had been lost during the restrictions on activity earlier in the year. The rise in the construction PMI to 54.7 in November had been in contrast to the substantial contraction in construction activity that had occurred after the 23 March lockdown, particularly in April and May. Indeed, the construction PMI had reached a record low of just 8.2 in April from 39.3 in March and 52.6 in February as most construction sites closed following the lockdown that was imposed on 23 March.
“At 54.6 in December, the construction PMI was markedly in expansion territory as it was clearly above the 50.0 level that indicates flat activity.”
House building led way and robust in December
Howard Archer continues: “Construction activity was led by the house building sector in December which grew at a stronger, robust rate. The housing market has seen a marked pick-up in activity since restrictions were increasingly lifted from May, further helped by the Chancellor temporarily raining the Stamp Duty threshold from mid-July and many people re-evaluating their housing needs and desires – although uncertainties remain about its longer-term outlook.
“Commercial activity grew for a seventh month running in December but at the slowest rate since May. Civil engineering activity contracted modestly again in December after expanding for the first time in four months in November.”
New business growth elevated
Howard Archer says: “Most elements of the construction survey were decent in December, and it was particularly welcome to see that new business grew at the second fastest rate (after November) since December 2015. Markit reported survey respondents noted improving client demand, alongside a boost from new business wins on construction projects that had been deferred at the start of the pandemic.
“Confidence in future activity among construction companies rose to the highest level since April 2017. Markit reported “Construction companies are hopeful that higher demand will broaden out beyond residential projects in the next 12 months, led by infrastructure spending and a potential rebound in new commercial work from the depressed levels seen during the pandemic.”
“Employment in the construction sector edged up in December for the first time since March 2019.”
Outlook for UK economy
Howard Archer adds: “The performance of the construction, manufacturing and services sectors in November and December, according to the purchasing managers, highlights that the overall impact of the national lockdown in England and other restrictive measures on economic activity in Q4 2020 was markedly less than occurred in April and overall in Q2 2020 following the March restrictions.
“Indeed, the EY ITEM Club had believed that GDP contraction in the fourth quarter could be limited to not much more than 1% quarter-on-quarter. However, the increased restrictions announced on 20 December mean that Q4 2020 GDP contraction is now estimated to be closer to 2% quarter-on-quarter. This would result in overall GDP contraction of 10.5% in 2020.
“With lockdown now back in place in England and restrictions elsewhere that are set to last through to mid-February at least, the economy will have a challenging start to 2021 and will undoubtedly experience contraction in the first quarter. The EY ITEM Club suspects that the first quarter decline in GDP could be in the region of 3-4% quarter-on-quarter. This would result in a double dip recession.
“After that, the EY ITEM Club expects the economy to benefit progressively through 2021 from the roll-out of the COVID-19 vaccines. Many consumers are well placed to spend given the recent high savings ratios. However, the current GDP growth forecast of 6.2% for 2021 is now clearly too optimistic given the difficult first quarter – 5.0% growth may well now be the limit.”