Economic overview

Headwinds move from gust to gale

Against warnings of recession from the Bank of England, economic activity held out in the three months to May 2022, growing by 0.4 percent. Gross Domestic Product (GDP) also grew by 0.5 percent on the month in May 2022, surprising many analysts, increasing after a decline of 0.2 percent in April 2022.

Even so, the economy is weakening, with month on year growth in May 2022 subsiding to 3.5 percent, its lowest figure for two years.

Inflation, exacerbated by war in Ukraine, rising energy costs and repeated lockdowns in China, is arguably the biggest threat to growth. The surging cost of living has already dented consumer spending as people’s disposable incomes are cut.

The continuing rise in the Consumer Price Index (CPI) is also a threat to growth and optimism. It reached 9.4 percent on the year in June 2022 and many commentators expect it to hit double digits later this year – even though there is a belief that some price effects will subside in 2023.

Interest rate increases are a major reason for that optimism, yet they are a double-edged sword. Should the Bank of England rapidly increase the base rate beyond its current 1.75 percent level, there is a risk that the economy could cool further. Credit availability has reduced, and the amount at which loans need to be repaid has gone up, contributing to reduced levels of consumption.

Despite the economy losing heat, there are still some bright spots. Chief among them is the resilience of the UK labour market. Inflation and low levels of growth seems to have had very little effect on unemployment so far, with the unemployment rate at 3.8 percent in the three months to May 2022.

With job vacancies also high, further cooling – or even contraction – in GDP could translate into fewer job advertisements, rather than a significant increase in unemployment.

Construction output in May 2022 recorded just over £15bn and is now 4.1 percent above pre-pandemic levels of output seen in February 2020. Activity continues to be variable at a broad sector level, which is expected to continue across 2022.

Repair and maintenance work is outstripping new work following a period of increased home improvements and a swifter uptake of smaller volume and value projects during COVID-19 uncertainty. The industrial and private new housing sectors are performing well; as the brick to click trend continues, retailers are requiring additional warehouse space and logistic hubs, while a buoyant housing market has fuelled the development of new homes.

In the short term, construction output is likely to weather some of the effects of war in Ukraine. Construction new orders increased by 13.4 percent on the year in Q1 2022 and this committed expenditure may support growth through 2022.

However, the monthly S&P Global / CIPS UK Construction PMI for June 2022 reported the weakest rise in construction output since September 2021, so a slowdown in activity over the coming months is possible.

Softening client demand and rising inflation may not be the biggest risks to project and programme delivery. They are increasingly being joined by an unwelcome threat – insolvency. Few things derail a project so quickly and severely as the failure of a key supplier. Spotting the tell-tale signs of supply chain stress and ensuring brilliant basics are in place must now be front and centre of industry thinking.

Economic data

GDP at (market price) index

Q1 2022: 101.0 Q4 2021: 100.2 Increase: 0.8%

Bank of England base rate

Aug 2022: 1.75 May 2022: 1.0 Increase: 0.75 Base points

Consumer price inflation

June 2022: 121.8 June 2021: 111.3 Increase: 9.4%

Unemployment level (thousand)

Q1 2022: 1,259 Q4 2021: 1,373 Decrease: -8.3%

Construction output index

Q1 2022: 99.1 Q4 2021: 97.0 Increase: 2.2%

© 2022 Turner & Townsend