Economic Week In Review | Issue 455 | 11 November 2024

UK construction and property

• PMI | The latest Construction Purchasing Managers’ Index (PMI) dropped in October as high borrowing costs dampened new orders in all sectors. PMI came in at 54.3, a drop from 57.2 in September. Any number above the neutral mark of 50.0 represents output growth. Despite the slowdown, October’s PMI is still above the 2024 average of 51.4, signalling a strong expansion in the construction industry this year.
• Workloads | The latest survey by the Federation of Master Builders (FMB) shows that smaller builders are reporting falling workloads, labour shortages, and rising material costs. Only 27% of respondents experienced increasing workloads between Q2 and Q3, while 32% saw falling workloads.
• Nutrient mitigation | The Ministry of Housing, Communities & Local Government has set up a £47m fund to try and unblock house-building which has been stalled by rules on net neutrality. The Home Builders Federation estimates that over 160,000 homes have been stalled as they cannot demonstrate compliance with the rules.
• Merger talks | The British Property Federation, the Association of Real Estate Funds, and the Investment Property Forums are discussing a merger which would allow them to become a single voice for the UK real estate sector. Shadow boards have been created in each organisation to oversee the next stage of discussions.
• RC transfer slab design | The Institute of Structural Engineers (IStructE) has produced fresh guidance for the design of reinforced concrete transfer slabs after concerns about a knowledge gap. The guidance is available here: https://www.istructe.org/resources/guidance/design-of-transfer-slabs/
• New Towns | The task force is seeking views on potential locations for new settlements of more than 10,000 homes. New Towns are expected to deliver housing, economic growth, and a standard of 40% affordable homes. A core part of the task force’s work will be to consider how to deliver and fund a shortlist of schemes which will be recommended to ministers next July.

Global economy

• Chinese exports increased in October, increasing its trade surplus due to the prospect of a Trump victory. Polls in October showed that the race to the White House was close. This is expected to increase tensions between the incoming administration and China. Exports were expected to rise by 5% but grew by almost 13% in October.
• Chinese stimulus | The stimulus package announced by Chinese authorities last week disappointed the markets and failed to shore up the economy. The Hang Seng index, which is seen as a barometer for foreign investor sentiment, fell by 1.5%.
• US Presidential election | Former President Donald Trump was re-elected to the White House. He becomes the first former president to return to the White House in more than 130 years and, at 78, the oldest man elected to America’s highest office. Trump will be sworn in as the 47th president of the United States on 20th January 2025.

UK economy

• House prices | According to forecasts, house prices are set to grow almost twice as fast as inflation over the next five years. House prices are expected to grow by 20% between now and 2029, according to the latest residential forecast from property firm JLL, with this uptick outpacing the 11.6% increase in CPI which has been predicted by the OBR over the same period.
• Pension reforms | The Treasury has confirmed reports that pension reforms will be part of a major speech delivered by the Chancellor at the annual Mansion House address later this week. It says the reforms will “unlock more private investment to fuel the government’s growth mission.”
• Interest rates | The Bank of England cut interest rates to 4.75% a 0.25 percentage point cut. The Bank warned that inflation will creep higher because of the Budget – although not to previous highs -meaning the UK interest rates could take longer to fall.

Materials and commodities

• Gas concerns | Analysts are concerned that the region may suffer from higher gas prices over the colder months despite Europe’s gas storage facilities being full. Europe has diversified its supply away from Russian sources towards liquified natural gas (LNG), but the supply of this is expected to tighten.
• Bricks | Forterra announced plans to pass on the recent increases to Employers’ National Insurance Contributions, stating that it expected “modest levels of cost inflation heading into 2025” and that it had secured 80% of its energy requirements for 2025.
• Rebar | A controversial plan at Chatham Docks in Kent has been approved which will force ArcelorMittal to close its rebar facility, which supplies 30% of the UK’s needs. The Managing Director of ArcelorMittal Kent Wire has warned that there are no suitable alternative sites in the UK.
• Steel | The UK’s Business Secretary has held urgent talks with Jingye – the Chinese owner of British Steel – to talk about measures to stop it from closing its UK operations.

Environment

• Temperature | The EU’s Earth Observation Agency confirmed that the global temperature rise is expected to reach an average of 1.55C above pre-industrial levels this year. It is “virtually certain” that this year will be the warmest on record. The Paris climate agreement set a limit of 1.5C, measured over decades.
• Drought | The world’s largest human-made lake, Lake Kariba, powers Zambia and Zimbabwe through hydroelectric dams. A mind-rainy season dry spell and drought means that the dam may have to be shut down for the first time in its history. Power cuts of between 17 and 21 hours a day are not uncommon.
• Wind farms | Plans to build the biggest onshore windfarm in England will move forward this week after Labour lifted the de facto ban put in place by the Conservative government nine years ago. Plans have been submitted to erect 21 wind turbines next to an existing wind farm in north Manchester.
• Climate action | Business leaders, ambassadors, industry experts and representatives from the COP Troika governments of the UAE, Azerbaijan and Brazil joined a discussion/round table hosted by the UK government and chaired by Energy Secretary Ed Miliband, Development Minister Anneliese Dodds, and Environmental Secretary Steve Reeds on the 6th November to galvanise climate action ahead of COP29. The UK will play a leading role in securing a new and expanded financial goal that unlocks more funding from the private sector and financial institutions to help scale up climate action in developing countries. Each round table focused on gaining agreement from participants helping set the stage for impactful dialogue in Baku, Azerbaijan. The topics covered during the round tables included; mobilising finance for a green energy transition, building the business case for adaption and resilience and a plastic pollution treaty round table.   

Europe’s Carbon Border Adjustment Mechanism (CBAM)

CBAM is designed to stop European firms from evading carbon compliance costs by sourcing commodities from regions with more relaxed environmental regulations. Formally launched in 2023 as part of the European Green Deal, it will force importers to buy credits to cover the emission of steel, aluminium, cement, electricity and chemicals they buy from outside the EU.

From 2026, CBAM will start imposing levies on steel production, a sector responsible for 7% of global carbon dioxide emissions, with it being fully phased in by 2034. While many countries have been vocally against it, they are also taking action to minimise its impacts and benefitting from it. China now has 18 electric arc furnaces under construction, two will be powered entirely by solar panels. South Korea is building one with Meranti Steel, headquartered in Singapore investing $60 million in a green steel plant in Indonesia. Established steel makers, including Indian steelmaker JSW are also ramping up their green steel capabilities. JSW plans to produce all its exports to the EU in furnaces powered by renewable and using recycled scrap as feedstock. Supporters have argued that CBAM will help encourage the decarbonisation of industries abroad, but critics state it could create a two-tiered market allowing companies to produce green steel for Europe and dirty steel for everyone else.  

Reducing Emissions from Non-Road Mobile Machinery (NRMM)

The global construction industry is responsible for 39% of total carbon emissions. In 2020, 2.5 million tonnes of diesel were consumed by the UK construction industry, emitting 6 million tonnes of CO2, greenhouse gases and other air pollutants. The London Atmospheric Emissions Inventory 2019 found that NRMM exhaust emissions in construction is a significant contributor to London’s air pollution. In April 2023, 1,365 NRMMs were actively operating in London of which 1,163 were compliant with the NRMM Low Emission Zone (LEZ).   

 The NRMM LEZ requires all engines with a power rating between 37 kW and 560 kW to meet an emission standard based on the engine emission ‘stage’. Stages describe the standards that need to be met depending on where the site is. The current standards are stage IV for construction machinery in the CAZ (Central activity zone) and OAs (Output Areas), and stage IIIB in the rest of London, this will get tighter over time.   

A techno-economic feasibility study by environmental consultant Environmental Resources Management on behalf of The Department for Energy Security and Net Zero on decarbonisation options for NRMMs looked at three potential abatement options for the transition to lower emissions. It considered:   

• Fuel-switching, away from fossil fuels to lower carbon energy sources, such as biodiesel, electricity, or hydrogen.
• Efficiency measures, through the improvement of machines, operations or processes that reduce the amount of energy and fuel needed to produce the same output. 
• Process change, processes currently using NRMM are changed so that the machines are no longer required to complete a particular task.  

 This is important as from the 1st of January 2025, standards will be stage IV across London, and from the 1st of January 2030, standards will be stage V across London, with only zero machinery being allowed in London from the 1st of January 2040.