Data from the ONS and OBR points to a tick-shaped not a v-shaped recovery, says Construction Products Association’s Rebecca Larkin 

With the latest pile of Office for National Statistics (ONS) data comes confirmation of the extent to which the coronavirus lockdown impacted the economy and construction. For the three months to May, the UK economy contracted by a record 19.1%. Not surprisingly, the main hit was in April, when gross domestic product (GDP) registered a 20.4% fall in the single month. But, even as lockdown restrictions began to be lifted in May, the economy only regained 1.8%. Expectations were for over 5% growth.

Rebecca Larkin

In previous recessions, construction output has fallen three times more than GDP on average. This time, the nature of the enforced shutdown that widely affected retail, hospitality, and education meant that the services sector accounted for 15 percentage points of that 19.1% drop in GDP.

That is not to distract from the significant impact of lockdown on construction, however, which suffered the largest sectoral decline of 29.8% over March, April and May.

It is important to note that the ONS collects this data through a survey of contractors, so only those who were still active during the lockdown would have been able to respond. Over a quarter of construction firms reported a temporary pause in their activity in the first four weeks of lockdown, which means this fall in activity is likely to be an underestimate.

Recovering the lost ground is unlikely to be as quick as the speed it was lost 

While this backward-looking data now fills in some of the blanks about the initial impact of the lockdown, it is perhaps more pressing for the industry to look forward to the shape of the recovery to come. Recovering the lost ground is unlikely to be as quick as the speed it was lost and most macroeconomic forecasters project that it will take until 2022 for the economy – and construction – to return to pre-coronavirus levels of activity.

This week, the Office for Budget Responsibility (OBR) concurred in its updated assessment of economic prospects. Its initial scenario published in April had previously stood out as being on the optimistic side, with the economy rapidly shrugging off the pandemic’s effects by the end of this year.

What has remained a concern in their scenario, however, is the potential for a significant spike in unemployment. The government’s large package of mitigation measures has helped avoid large-scale redundancies, bankruptcies and liquidations as businesses temporarily closed. As these schemes wind down, though, the economy will still be near the bottom of its climb back up. 

What has remained a concern is the potential for a significant spike in unemployment

The OBR’s most optimistic recovery scenario envisages the unemployment rate reaching 9.7%; in its central scenario, the peak of unemployment at 11.9% coincides with the end of the Coronavirus Job Retention Scheme and its assumption that 15% of the 9.4 million jobs that have been furloughed since the launch of the scheme in April will be lost. This implies a short, sharp rise in the unemployment rate from 3.9%, where it was at the start of the year. After the 2008/09 recession, unemployment peaked at 8.5% but took a couple of years to get there.

It appears that the labour market will create a near-term bump in the road to recovery for the economy and construction. The government’s extensive fiscal support will take net borrowing to £322bn for the current financial year, representing the highest peacetime level in over 300 years. As the OBR points out, a return to austerity will be inevitable in the longer-term because once we do get back to the good times, the expenditure during the bad times will need to be recouped.

Rebecca Larkin is the senior economist for the Construction Products Association