Ideas: Building back to growth

Prescient is not a word that often gets used to describe Boris Johnson but when the Prime Minister said the UK needed to “build, build, build” to fuel the economic recovery, he was certainly ahead of figures released yesterday (July 6), which show that business activity in the construction sector returned to growth in June. Richard Dawson looks at how housebuilders could hold the keys to the coronavirus rebound

Surveys of purchasing managers in a cross range of sectors are beginning to shine a light on what kind of recovery the UK might be headed for.

After ploughing depths previously unexplored in April and May, PMI readings have started to stabilise, fuelling hopes that the worst could be over.

The June PMI for the UK construction sector is the best example of this so far. Released yesterday (July 6) by IHS Markit, the headline UK Construction Total Activity Index jumped to 55.3 in June, up from 28.9 in May.

This is the strongest PMI reading the UK has recorded since the coronavirus crisis began in March and the first to be firmly over the 50.0 mark that separates growth from contraction. The June reading also reflects the fastest expansion of total construction output since July 2018.

The improvement is being driven by housebuilding, which expanded at its fastest rate for just under five years. Commercial and civil engineering projects also returned to growth, though not as sharply as residential work.

After seeing a litany of unthinkably low readings in recent months, it’s encouraging to see the UK construction sector returned to growth in June. However, both new orders and business expectations remained subdued and employment numbers continued to decline.

Worries about long-term demand in an uncertain economic climate led to fewer construction jobs being created, sustained use of the furlough scheme and, in some cases, redundancies.

Despite these downside risks, it’s fair to say the outlook for construction is better than for other sections of the UK economy, particularly when you factor in reforms to the planning system announced last week (June 30) by Boris Johnson.

Struggling to be noticed in among the Rooseveltian rhetoric, changes to planning regulations were probably the most economically-significant aspect of the Prime Minister’s ‘New Deal’ speech.

Announcing a modest £5 billion of new funding, Mr Johnson might have been better served focussing his remarks on what was written on the front of his podium – ‘build, build, build’ – rather than igniting comparisons between himself and the 32nd US President.

Under the new regulations, which in practice amount to the removal of existing regulations, developers will be granted greater freedoms to create new homes in town centres without needing to seek planning permission for change of use.

This would allow existing commercial properties, such as vacant retail shops and office blocks, to be converted into residential housing more easily. A building used for retail could also be permanently used as a café or office without requiring local authority approval.

The changes have been proposed to “kick start the construction industry and speed up rebuilding,” according to the Prime Minister.

From September, builders will no longer need a normal planning application to demolish and rebuild vacant residential and commercial buildings, provided they are rebuilt as homes.

Property owners will also be able to build additional space above their properties, subject to neighbour consultation.

While being an important step in the bid to revive the UK’s ailing high streets and boost growth, planning experts and environmental groups have expressed concern at the changes to the existing system.

In an interview with the Guardian, University College London professor Ben Clifford, said the reforms could lead to thousands of poor-quality “rabbit hutch” flats being crammed into commercial buildings that lack proper amenities and green space.

Professor Clifford added that the UK risked creating “the slums of the future” unless there were proper safeguards and regulations in place.

Mr Johnson also drew the ire of the National Trust and the Wildlife Trust when he claimed that environmental assessments were responsible for holding up housebuilding projects.

Campaigners now fear that deregulation of the planning system would lower environmental standards and threaten the UK’s already fragile natural habitats.

Ministers will no doubt be quick to soothe these apprehensions, but what’s clear is that Whitehall sees the construction sector as having a big role to play in the national recovery from COVID-19 and is committed to creating a regulatory environment (no pun intended) that allows for maximum gain.

Given that construction is the first sector to see business activity return to growth as per the June PMI, it could be a prudent strategy. The question is, at what cost to nature and build quality?