Chris Jones, Industrial Consultant for Odgers Interim, discusses what the latest ONS figures from May this year reveal on the current and future state of the construction industry.
The May 2020 ONS figures certainly make for some startling reading; one headline statistic shows construction output falling some 29.8% in the three months leading up to May. However, there are also signs of the green shoots of recovery emerging. We can take the record margin growth of 8.2% in construction output in the month of May, for example, as an indication that the construction landscape is stabilising and even on an upwards trajectory.
The record falls earlier in the year did not come as a huge surprise given the shock of the initial total lockdown and the inevitable collapse in demand across the sector. Later figures have shown that in the month of June, there has been a record number of insolvencies in the sector. These have largely been for small and medium sized businesses who have been managing tighter margins and smaller cash reserves by and large. But it also shows how vulnerability and sensitivity still remain in the market, exasperated by the shocks of COVID-19. However, this can be justified as fall-out from the short-term response effort of the industry as companies were trying to find their feet and address the initial crisis.
Now, as many major companies are re-emerging, we have started to see significant projects resume and new opportunities arise. I think it is safe to say we can expect these figures to improve through the summer as demand picks back up and social distancing measures are eased further. The sector has also been buoyed by the recent ‘new deal’ announcement from the Government – an extra £5bn of funding on the table will certainly support the sector’s recuperation.
Although the disruption will have been hugely damaging financially, many companies were quick to react, demonstrating high levels of agility. The low period of construction activity was used as time for business transformation. Over the past few months, we have seen a great number of accelerated digital transformations, whether plans were in the pipelines or emerged as a reactionary measure. A prime example of this was the residential building companies. This sub-sector of the industry was one of the strongest performing in June. Such a success was aided by the easing of lockdown measures, but should no less be attributed to their quick adaptation to change. Many companies seamlessly shifted their customer proposition from onsite physical viewings, sales and marketing to online efforts. Initiatives like these will ensure the construction industry is not only better equipped to cope in the short term, but will revolutionise businesses to be better prepared for the future and further disruption.
A point worth considering is that the ONS figures do not take into account the wider biosphere of construction; reporting on the activity of architects, designers, engineers and manufacturers of building products is not included in the figures. Looking outside of this information to consider a wider picture of the market, we can see indication of manufacturers receiving some compensation from the rise of a DIY trend during lockdown. Homeowners took to home improvement which will have enabled manufacturers to pick up some of the slack resulting from the initial downturn in the professional sector. Looking to the UK Purchasing Managers Index for June for further information, we can see reporting of a positive trend represented in their finding of rapid expansion in activity, the most since December 2015. Exploring this more critically, we can interpret this positivity and hope for a rapid recovery as a result of the completion of work that was stalled at lockdown. Yet, there is still great ambiguity in what the pipeline of work for quarters three, four and beyond might consist of.
Looking at this future landscape for the industry, all discussions have to be considered in the context of Brexit – a topic almost forgotten over the past few months during the height of the pandemic. With an agreement still not signed, January 1st is looming and continues to feed uncertainty to businesses still with strong ties to the EU. What Brexit will mean for the European Payment Order system, the availability of labour and the supply of materials continues to be discussed with no assured conclusions.
A further unknown to consider is the long-term impact of the pandemic on the real estate market. Questions around the return to the office and the future of retail are highly influential to the market, but as they remain unresolved for the foreseeable, the construction industry’s ability to carry out longer-term planning of 12-18 months, and beyond, is compromised.
There have certainly never been a more challenging set of circumstances facing the industry. Where we are starting to see signs of recovery, the key has been a quick response enabled through high levels of flexibility. Going forward, the most successful companies with the fastest recovery will be those who have been able to adapt, pivoting with the volatile market conditions. This agility needs to be embedded into the organisation, with a complementary workforce able to fare these turbulent conditions.
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