A question of strategy

Economic Week In Review | Issue 351 | 17 October 2022

UK construction

  • Carbon bubble | The Urban Land Institute has warned that the property sector’s failure to cut emissions could increase the risk of major writedowns as owners and valuers have failed to account for the cost of transitioning to net zero, causing assets to be overvalued.
  • Water infrastructure | Anglian Water revealed the planned location for the second of two new reservoir projects in the Fens. It will supply enough water for around 250,000 homes. Each of the projects is expected to cost between £1bn and £2bn.
  • Project Speed roads | Balfour Beatty, Costain, Kier, and Keltbray have signed a contract to deliver the £1.3bn A66 Northern Trans-Pennine road project. Under the Government’s “Project Speed pathfinder” the teams are asked to halve construction time which will bring the completion forward by five years, to 2029.
  • Floating wind | The European Marine Energy Centre, which is based in Orkney, has designed a new 100 MW floating offshore wind test and demonstration site. It hopes to lease a site 20km west of Orkney and install six berths for offshore wind turbines.

Materials, commodities and currencies

  • Material sales have fallen for the first time in two years. Heavy-side material producers reported that sales in Q3 fell for the first time since the Covid-19 lockdowns. Light and heavy-side producers expect falling sales over the next 12 months, according to the Construction Products Association.
  • US Dollar | Hedge funds expect the Dollar to rise further as monetary policy in the US tightens. The Dollar has already increased 18% against a basket of six peers this year, setting it on course for a record annual increase.
  • Oil | Opec+ surprised the market by cutting output which caused petrol prices to rise in the UK and encouraged countries to look to diversify their oil imports. Opec+ reduced output stating that the world economy has entered a period of “heightened uncertainty and rising challenges” which will reduce demand.

UK economy

  • All change | The UK has its seventh Chancellor in six years after Kwasi Kwarteng was replaced by Jeremy Hunt, who will make a statement this week bringing forward measures from the medium-term fiscal plan which will be delivered on 31st October along with a forecast from the OBR.
  • Government spending | The IMF has urged the Government to rein in spending so that it can become more resilient to an increasingly “shock-prone” world. It warned that greater debt levels were no longer appropriate, a reversal of its encouragement in previous years for governments to leverage cheap debt.
  • Corporation Tax is set to rise according to the previous plans set out by the previous Government as the Prime Minister announced that some of the planned cuts will no longer take place. In March this year, the then Chancellor Rishi Sunak announced an increase in Corporation Tax from 19% to 25% in April 2023.

Global economy

  • Energy aid | A commission of 21 experts in Germany has proposed that the government should pay all private households’ gas bills in December and provide subsidies for residential and industrial gas prices for more than a year. The measures would cost €91bn. The proposal suggests that industrial companies should pay 7 cents/kWh for 70% of their gas consumption for 16 months, starting from January 2023. Gas contracts have currently increased to between 20-30 cents/kWh, up from 7 cents before the crisis. The panel expects gas prices to settle to 12 cents/kWh in the future.
  • Recession warning | The IMF has further downgraded its forecast for the global economy warning that “the worst is yet to come, and for many people 2023 will feel like a recession” as there is a 25% probability that growth will fall below 2%.
  • Winter heating | The Copernicus Climate Change Service updated its seasonal outlook and now suggests that temperatures will probably be significantly above normal during the peak heating season – December to February. Whilst this is clearly not positive, it does mean that we could see lower demand for heating over winter.

Friday to Friday

Price / Index Week %
change
Annual %
change
FTSE 100 6.85 -1.89 -5.19
FTSE 250 17,032.82 -1.85 -25.89
Nikkei 27,090.76 -0.09 -6.80
CSI 300 3,842.47 1.90 -22.09
S&P 500 3,583.07 -1.55 -19.87
Nasdaq 10,321.39 -3.11 -30.72
CAC 40 5,931.92 1.11 -11.83
Dax 12,437.81 1.34 -20.21
$ per £ 1.1210 0.73 -18.51
€ per £ 1.1510 1.31 -2.99
Gold £/oz 1,470.74 -3.76 14.43
Brent Oil $/barrel 91.63 -6.42 7.98

Weekly Summary

Continued turmoil in UK politics, means that it is increasingly difficult to judge investor sentiment and the future of construction pricing. Every investor, and therefore every project, will have a different value driver and timescale so it is important to judge each project on its own merits.
Infrastructure output continued to grow this month, supported by resilience planning and the previously announced Project Speed work. As we await the fiscal statements from the new Chancellor, many will be watching to see what the future holds for infrastructure spending.

Author contact

Rachel Coleman
Rachel Coleman,
Associate Research Analyst

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