As the Covid-19 outbreak slows construction activity, Turner & Townsend economist Kristoffer Hudson examines what can be learnt from past economic downturns.
As the UK began to implement emergency measures and a national ‘lockdown’ to prevent the spread of coronavirus, construction saw the biggest drop in output for almost 11 years, according to the IHS Markit/CIPS UK Construction PMI.
The UK Construction Total Activity Index fell sharply from 52.6 in February to 39.3 in March, with works halting across many sites and new orders stalled in the first weeks of the lockdown. Along with weak performance in service and manufacturing industries, the March PMI data is another early indication that the Covid-19 crisis has caused the UK economy to contract in the first quarter of this year.
This is likely to extend into the next quarter with the Office of Budget Responsibility already warning that GDP could fall up to 35% between April and June.
Analysis of the past three UK recessions illustrates that the period of recovery is dependent on how deep a recession bites into the economy. The weaker the economy becomes, the longer it takes to recover.
There are some crumbs of comfort, however, that once restrictions are lifted there could be less lasting damage to growth than in prior recessions.
What are the implications for industry pricing?
Recessionary periods create deflation in pricing. Looking at the peak-to-trough movements in tender prices over the past three recessions, tender prices fall by an average of -16.9%. In terms of duration, this ranges from five quarters in 1980/81 to 12 quarters in 1990/91, before they hit their trough.
To return to the peak seen in the tender price index prior to its fall, it takes around 24 quarters on average – or six years.
There will undoubtedly be downwards pressures on pricing due to weakened demand as clients wait for the pandemic to pass. Future tender pricing will be determined by a unique confluence of factors because there is a big difference in the circumstances we face today.
The weaker pound, restarting of Brexit trade negotiations plus interruptions to domestic supplies and imports of construction materials and components from virus-hit countries could all result in cost spikes.
Added to that, accelerated insolvencies will diminish supply chain capacity and greater risk allowances could be factored into bids. As construction sites reopen, there may be fewer pressures from labour shortages, but productivity will certainly be impacted as contractors grapple with social distancing measures on sites.
