Construction Industry Scenarios 2020-22 Autumn 2020 Edition - £210 Contents Overview 3 Economy 14 Private Housing 23 Private Housing RM&I 29 Public Housing 34 Public Housing RM&I 39 Public Non-housing 43 Public Non-housing R&M 51 Commercial 54 Private Non-housing R&M 65 Industrial 67 Infrastructure 71 Infrastructure R&M 83 © 2020 Construction Products Association. All rights reserved. This document is licensed for the exclusive use of Members of the CPA and purchasers of its economic forecasts (£210, including 20% VAT). Please do not publicly distribute this document. Additions to the distribution list can be made by contacting the CPA at 020 7323 3770. DISCLAIMER All construction figures (starts, completions, orders and output) refer to Great Britain. All output figures are in 2016 constant prices using the historic figures from the Office for National Statistics (ONS) – as at 30 September when the Scenarios were finalised. All new orders figures are in 2016 constant prices using the historic figures from the Office for National Statistics (ONS). The information in this booklet has been prepared by Construction Products Association and represents the views of Construction Products Association without liability on the part of the Construction Products Association and its officers. *Please note the images in this publication were shot before social distancing measures took effect. 2 Overview In the CPA’s main construction scenario, construction output is anticipated to fall by 14.5% overall in 2020 before rising by 13.5% in 2021. Although the Autumn estimate for construction output contraction in 2020 would be the largest fall in construction output on record, this still relies on sustained recovery throughout the second half of 2020 following the historic falls in construction output in the first half of the year. Output in 2020 Q2 was 36.1% lower than in 2019 Q4, prior to the social distancing restrictions, and 36.8% lower than the 2019 Q1 construction output peak. Furthermore, the overall figure for 2020 represents an upward revision to the Autumn Main Scenario compared with Summer due to the rapid return to site for existing projects and pent-up demand for housing and refurbishment work as well as social distancing and other safety measures easing and, consequently, being less of an hindrance to productivity on site than previously assumed. The CPA’s Main Scenario is still based upon a ‘V’-shaped UK economic recession and recovery, which is better described as ‘tick’-shaped. The ‘V’-shaped scenario describes the sharp decline in UK economic activity in 2020 Q1 and, in particular, Q2 following the social distancing restrictions imposed on 23 March that started to be eased in mid-May, as assumed in previous CPA scenario documents. UK GDP fell by 2.5% in 2020 Q1 and 19.8% in 2020 Q2. The unprecedented fall in UK economic activity in the first half of the year reflects the effective shutdown of large parts of the economy and, in particular, the services sector, which accounts for 79.6% of the UK economy. The ‘V’-shaped or ‘tick’-shaped scenario also describes an initial rapid UK economic recovery in June Construction output to and Q3 due to easing of social distancing restrictions and fall by during 2020, reopening of large parts of 15% the economy, so rapid growth the sharpest fall on record from a low base. However, despite rapid recovery in the from Q4 onwards, although economic growth is expected second half of the year to continue, growth rates • Construction output falls 14.5% in 2020 are expected to be slower due to rising unemployment after the end • Construction output in 2021 anticipated to of the government’s Coronavirus be 3.0% lower than in 2019, pre-coronavirus Job Retentions Scheme (CJRS) in • Private housing output falls 20.7% in 2020 October. Although the government has announced a Job Support Key Points • Commercial output is anticipated to fall Scheme to replace this, starting in 18.2% in 2020 November, in its current form it is unlikely to be utilised as much • Private housing repair, maintenance and as the CJRS (see Economy). The improvement falls 14.5% in 2020 CPA’s alternative scenario, the ‘W’- • Infrastructure output in 2021 is expected to shaped scenario, describes an initial be 27.4% higher than 2019, pre-coronavirus recovery in June and Q3 similar to 3 the ‘V’-shaped scenario but takes account of a potential second wave of coronavirus infections Construction output in the colder weather during Winter alongside to grow by flu that may necessitate a return to a nationwide lockdown. At the time of writing, local and regional lockdowns are currently ongoing that 14% in 2021 restrict social interactions but they are primarily not aiming at restricting economic activity, which occurred between 23 March and mid-May. If the UK had a return to a strong nationwide lockdown then UK GDP may see a second dip in Q4 although it is worth noting that if this were to occur then the second decline in economic activity would not be as sharp a fall due to the increased business continuity having learnt from the initial experience of restrictions with social distancing and other safety measures in place. In particular, within construction, site operating procedures would enable a considerably higher degree of construction activity in a second lockdown than occurred in April and May. The construction activity recovery so far during the second half of 2020 has been boosted by government, either directly through infrastructure and public housing repair, maintenance and improvements (rm&i) spending or indirectly through housing policy stimulus for housing that provides a boost to house building and potentially energy-efficient retrofitting activity. Infrastructure activity has been sustained to a considerably greater extent than most other construction sectors throughout the whole year due to a strong pipeline of projects and frameworks across all key infrastructure areas. Infrastructure clients, public and regulated sectors, largely have long-term certainty of finance and have been keen to continue with on- site activity through the social distancing restrictions. In addition, it has proved considerably easier to enact social distancing and other safety measures on infrastructure sites, which generally tend to be large sites with fewer trades mixing in tight spaces compared with other construction sectors. Overall, infrastructure output is expected to fall by 3.0% in the main scenario in 2020 before growth of 31.4% in 2021. This growth is expected to be driven by main construction works ramping on large-scale projects such as HS2, following the notice to proceed in April, as well as an increase in activity in the second year of five-year investment programmes within regulated sectors. Government’s announcements have focused on a £5 billion ‘New Deal’ and “build, build, build” but this finance involves reannouncements Construction Output - Main Scenario 200,000 180,000 5.0% 5.9% 0.0% 1.9% 13.5% 3.9% 160,000 4.0% 10.0% 140,000 1.7% -14.5% 120,000 100,000 80,000 60,000 £ million - 2016 Constant Prices 40,000 20,000 0 2013 2014 2015 2016 2017 2018 2019 2020s 2021s 2022p s = scenario p = projection Source: ONS, Construction Products Association 4 or allocations of existing funding. The key government infrastructure announcement during Infrastructure the Summer was the National Infrastructure and Construction Procurement Pipeline for output in 2021 2020/21, which details work packages, projects expected to be and programmes that are planned to go out to market for procurement during this financial year higher than with a contract value of between £29 billion 27% and £37 billion. The detail of this increases the pre-coronavirus 2019 likelihood that this will occur to time and output from the smaller and medium-sized projects from the pipeline should be seen on the ground in 2021 and 2022. The only infrastructure sub-sector that is likely to see declines in activity over the next two years is gas, air and communications, due to retrenching activity from airports expansions and refurbishment programmes due to sharp declines in expected passenger numbers and consequent impacts on airport revenue. Private housing is currently relatively buoyant, having been the worst affected construction sector during the social distancing restrictions. Activity Private housing returned quickly to site during May and June primarily -21% focusing on completions of existing developments the worst affected but since July has moved towards also starting new sector in 2020, developments in response to strong consumer demand, illustrated by high house price inflation expected to fall by and forward sales figures higher than one year earlier. This house builder optimism has only been added to by government policy stimulus focusing on enabling more housing transactions in the general housing market through a stamp duty holiday in England and Northern Ireland with similar home sale tax reductions in Scotland and Wales that currently last until 31 March 2021. In addition, government has extended the deadline for completing homes under the current unconstrained version of Help to Buy to 28 February 2021 whilst the policy itself still finishes on 31 March 2021. As a result, house builders have been keen to take advantage of the positivity in the market and make up for lost ground in the second quarter of 2020. Public & Private Sector Construction Output - Main Scenario £ million 2018 2019 2020 2021 2022 Change on previous year Actual Actual Scenario Scenario Projection 37,740 39,246 34,964 40,500 41,976 Public Sector inc. PFI -3.7% 4.0% -10.9% 15.8% 3.6% 122,786 124,405 104,901 118,191 124,700 Private Sector 1.3% 1.3% -15.7% 12.7% 5.5% 160,526 163,651 139,865 158,691 166,676 Total Construction 0.0% 1.9% -14.5% 13.5% 5.0% Source: ONS, Construction Products Association 5 Overall, private housing output is expected to fall 20.7% in 2020 but given that in April, during the social distancing restrictions, private housing output was 63.1% lower than a year earlier, the overall estimate for 2020 is based upon rapid recovery in 2020 Q3 and Q4.