Rising costs and inflation are now inevitable but the economy is better placed to survive than it was in the 1970s, Richard Steer says
Over the past few months, I have been experiencing a strange sense of déjà vu. Perhaps it was the appointment of a new construction minister? After all, Lee Rowley has become the ninth government representative to take on the role in five years – and the 20th since 2001.
I hear that the departmental civil servants have stopped producing business cards for the hapless Mr Rowley, for fear that they will be out of date before he has had time to hand many of them out.
Then we have the energy price rises, followed by a petrol crisis, a shortage of carbon dioxide (the very gas we are trying to reduce to meet carbon reduction targets), and finally the spectre of tax rises that were not supposed to happen.
It is a bit like watching the Christmas special of the satirical comedy Yes Minister. Except that was a programme from the 1980s – and here we are in 2021.
We are not in a back-to-the-future scenario, where rampant inflation destroys the economy, as witnessed in the 1970s
So, what is happening and how will this affect those of us struggling to advise clients on the cost of construction, the timeline for buildings and the impact of Brexit? Let’s start with the good news.
Unlike many commentators reaching for historical metaphors, we are not in a back-to-the-future scenario, where rampant inflation destroys the economy, as witnessed in the 1970s. Yes, it is true that prices are rising, and they are going to keep on rising as supply and demand impacts labour and raw materials.
But it is over 50 years since the UK faced a serious threat of hyper-inflation after the much more far-reaching oil price increases. The oil embargo of the 1970s led to an eight-fold increase in oil prices, which brought with it inflation, recession and industrial unrest. We are not anywhere near that situation.
To give younger readers a flavour of that time, there was no internet, social media or Zoom. We had a three-day week, coal miners’ strikes, darkened streets, uncollected rubbish piling high, and the kind of wage inflation which saw the railwayman’s union turn down a 33% pay hike because they viewed it as being too low. There were four general elections in a decade, with two of them in just eight months.
If we look then at 2021, a return of those bad old days is made much less likely by the decline in union power and membership, the growth of global markets with international competition, and the independent mandate given to the Bank of England to keep inflation under control.
It is simply going to cost clients more to get jobs completed, and inevitably completion dates will be missed
I am not belittling the current situation for those trying to work in the built environment post pandemic, and next year will bring cost-push inflation for our sector. From the customers hiring an SME contractor, trying to build an extension, or for governments trying to complete on a major public sector infrastructure project, it is simply going to cost clients more to get jobs completed, and inevitably completion dates will be missed.
We can see the evidence mounting already. For example, payroll data from Hudson Contract shows average weekly earnings across all regions of England and Wales increased for the second consecutive month, with earnings up by nearly 6% on last year.
This is not a London-centric issue, illustrated by the fact that the steepest month-on-month change was seen in the North-east, where average monthly earnings rose by 7.3% with a year-on-year increase of 5.2%. Material costs also rose by 20% in the 12 months to July, say observers and architects are now feeling the impact of these price hikes.
The latest industry survey says that more practices are expecting workloads to stay flat in the coming quarter as worries over materials shortages and the sclerotic planning system grow.
Many of these issues will simply not be solved overnight as price increases are being driven by wider issues within the UK economy, including the impact of Brexit, changing consumer behaviour in the wake of repeated lockdowns, and the response to climate concerns. Heightened gas prices, for instance, saw steel manufactures shut down for a period last month fearing it to be simply uneconomic to continue production.
Unlike the carbon dioxide producers, they did not have the benefit of HMG riding to the rescue with a taxpayer-funded subsidy. But then steelwork is not as emotive an issue for our government as the threat of another cancelled Christmas.
The government will have to get used to coming back to the taxpayer for more handouts if it wants to ‘build, build, build’
It may be cold comfort, but I do not see us entering the apocalyptic territory we did in the 1970s – as some would have us believe. In those days current inflation at 4%, would have been a chancellor’s dream.
But I do forecast a tough time ahead for those trying to wrestle with changing forecasts and a market that is not sure whether it has enough confidence to invest cash in real estate. The government will also have to get used to coming back to the taxpayer for more handouts if it wants to “build, build, build”, as was the election slogan. Make no mistake, inflation is coming and it means the rising costs we are already seeing are a long way from peaking.
With an unsympathetic home secretary, who is not prepared to allow much-needed tradespeople into the UK from abroad, it is ironic that the immigration policies the government has championed have now starved the labour pool it requires in order to meet their own targets for new hospitals, prisons, schools and housing. But, to paraphrase the words of Sir Humphrey Appleby, the wily permanent secretary from Yes Minister, “Since when has government policy ever had anything to do with common sense”?
Richard Steer is chairman of Gleeds Worldwide