While the pandemic has left economic scars that will take time to heal, a concerted consumer driven recovery is expected in 2021. Having already displayed remarkable resilience throughout the crisis, industrial and logistics property demand should grow as a result of structural changes that have been accelerated by COVID-19.
The COVID-19 pandemic set the UK economy on a rollercoaster ride in 2020. The result was an annual GDP contraction of 9.9%, making it the worst year for the economy since 1709. The fluctuations in GDP seen during 2020 were on a scale that would have previously seemed unthinkable; GDP plunged by a record 19.0% in Q2 in the wake of the first lockdown, before growing by 16.1% in Q3.
There was further volatility in Q4, as the November lockdown caused a monthly drop in output, but overall quarterly growth of 1.0% was enough to ensure that the UK avoided a technical double-dip recession in 2020.
ROBUST LOGISTICS SECTOR
The impact of the pandemic has varied widely across different parts of the economy, with the most severe falls in output in 2020 coming in sectors such as accommodation and food services (-44.0%); air transport (-74.0%); and travel agencies and tour operators (-73.9%).
Sectors driving logistics property demand have performed comparatively strongly, with output in the warehousing sector falling by a relatively modest 4.4%; while postal and courier activities was one of the few parts of the economy to record positive growth, with output rising by 5.2%.
HOPE FROM VACCINES
The tightening of lockdown restrictions at the start of 2021 has made it inevitable that the economy will contract again in Q1. However, light at the end of the tunnel has been provided by a sustained fall in COVID infections since the start of the year and the swift rollout of the UK’s vaccination programme. The government has set out a roadmap for the reopening of schools and businesses over the spring, paving the way for a strong economic rebound in Q2.
The recovery is expected to be consumer driven, and boosted by the record levels of household saving seen throughout the pandemic. The Bank of England estimates that between March and November last year, households built up savings of £125bn in excess of what might otherwise have been the case. For many who have come through the pandemic with their jobs intact, there is cash to spend.
Purse strings may be loosened cautiously, with many households preferring to use cash hoarded during the pandemic to pay off debts or maintain higher levels of precautionary savings. However, the extra buffer provided by increased savings provides the foundation for households to get back to spending proportions of their incomes similar to pre-recession levels, with much greater speed than is normally the case following economic downturns.
JOB LOSSES AHEAD
Nonetheless, the pandemic has left the economy with scars that will take time to heal, and GDP is not expected to return to its preCOVID level until well into 2022. Job losses and business failures will continue after lockdown restrictions are eased.
A wave of redundancies can be expected when the government’s furlough scheme is finally wound up. These are likely to be concentrated in sectors with high levels of furloughing, such as hospitality and retail; and not the transportation and storage sector, which has a below average furlough rate.
Unemployment is generally expected to peak at 6-7% later this year. This is relatively low compared with the levels seen following previous recessions, indicating that the furlough scheme has been broadly successful in preventing mass unemployment during the pandemic.
Business failures are also likely to hit a peak later in the year. Many firms have dwindling cash reserves, and 21% of businesses surveyed by the ONS in early February said that they were at either severe or moderate risk of insolvency. Again, the greatest pain is likely to be felt in the hospitality sector, while logistics businesses report a lower than average insolvency risk.
The ongoing challenges facing companies are demonstrated by persistently low levels of business investment, which was 10.9% down year-on-year in Q4 2020. Business investment has lagged behind GDP growth throughout the pandemic, and a continuation of this trend could impact the strength of the recovery.
A further legacy of the pandemic, not yet fully understood through official data, is its demographic impact. Unofficial estimates suggest that the UK population may have fallen by as much as 1.3 million last year as overseas nationals, many of whom were employed in hard-hit sectors such as hospitality, left the country. A population fall on this scale would have significant implications for future economic growth, the size of the workforce and tax revenues.
ONLINE RETAIL STEP CHANGE
The pandemic’s longer-term impacts also include the acceleration of behavioural changes that were already underway. Online retail sales have made a step change, with their value increasing by 46.1% last year. The online share of total retail sales rose from 19.2% in 2019 to 27.9% in 2020. This has generated much increased demand for parcel delivery services, with the Royal Mail reporting that parcel volumes were up 31% in the nine months to December 2020.
While online retail’s market share may drop back once lockdown restrictions are eased, a permanent boost to online activity is likely to remain, due to the impact of increased homeworking on shopping habits, as well as the ramping up of online activity in retail segments where it was previously low, such as food, health and beauty.
The accelerated transition to online retailing has the potential to elevate demand for logistics space for many years. Capital Economics forecasts that it could boost industrial property demand by an additional 15% over the next decade, taking the total volume of extra industrial space required in the UK during 20202030 to 110m sq ft.
Logistics occupiers have also been impacted by supply chain disruption following the ending of the Brexit transition period at the turn of the year. While companies have weathered the initial effects of the new trading relationship, and the worst-case scenario of long traffic jams at UK ports has been avoided, extra costs and red tape could have a slow burning impact on trade activity throughout 2021.
The year ahead may not be plain sailing, but it is reasonable to be confident that the vaccine rollout will underpin a strong consumer-led economic rebound. The pandemic will have lasting impacts; it has set back economic growth by several years, but also re-shaped consumer and business behaviour in ways that will open up long-term opportunities across logistics and industrial property markets.
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