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Q4 2020www.fitchsolutions.comUnitUnited Kingdomed KingdomInfrInfrasastructurtructure Re ReporteportIncludes 10-year forecasts to 2029
ContentsKey View............................................................................................................................................................................................ 4UK Infrastructure Covid-19 Impact....................................................................................................................................................................................... 5SWOT .................................................................................................................................................................................................. 7Infrastructure SWOT.................................................................................................................................................................................................................... 7Industry Forecast........................................................................................................................................................................... 8Construction And Infrastructure Forecast Scenario ..................................................................................................................................................... 8Transport Infrastructure...........................................................................................................................................................................................................16Energy & Utilities Infrastructure ...........................................................................................................................................................................................27Residential/Non-Residential Building................................................................................................................................................................................34Industry Risk/Reward Index ....................................................................................................................................................40UK Infrastructure Risk/Reward Index.................................................................................................................................................................................40North America And Western Europe Infrastructure Risk/Reward Index: Low-Risk Environment Undermined By Weak Near-Term Growth Prospects ...........................................................................................................................................................................................................42Competitive Landscape.............................................................................................................................................................50Competitive Landscape...........................................................................................................................................................................................................50Company Profile...........................................................................................................................................................................54Balfour Beatty...............................................................................................................................................................................................................................54Infrastructure Methodology ....................................................................................................................................................55© 20© 2020 Fit20 Fitch Solutions Grch Solutions Group Limitoup Limited. All rights red. All rights reserveserved.ed.All information, analysis, forecasts and data provided by Fitch Solutions Group Limited is for the exclusive use of subscribing persons or organisations (including thoseusing the service on a trial basis). All such content is copyrighted in the name of Fitch Solutions Group Limited and as such no part of this content may be reproduced,repackaged, copied or redistributed without the express consent of Fitch Solutions Group Limited.All content, including forecasts, analysis and opinion, has been based on information and sources believed to be accurate and reliable at the time of publishing. FitchSolutions Group Limited makes no representation of warranty of any kind as to the accuracy or completeness of any information provided, and accepts no liabilitywhatsoever for any loss or damage resulting from opinion, errors, inaccuracies or omissions affecting any part of the content.This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 (‘FSG’). FSG is anaffiliate of Fitch Ratings Inc. (‘Fitch Ratings’). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2020 FitchSolutions Group Limited.United Kingdom Infrastructure Report | Q4 2020fitchsolutions.comTHIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data included in the report are solelyderived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.3
Key ViewKey View:In response to the impact of Covid-19 on the UK construction sector, we have revised downw our growth forecast for2020. The UK's economic slowdown and restrictions on labour movement will undermine the positive outlook we held for growth in2020, although significant upside risk exists for the sector amid a government push to realise an uptick in public investment ininfrastructure and buildings. We highlight the UK infrastructure sector, already a growth outperformer relative to the wider economy,as exhibiting further upside potential to its outlook amid government efforts to accelerate its existing policy agenda to realise amaterial uptick in public direct investment in infrastructure projects.Key Forecasts And Latest UpdatesWe now forecast the UK construction sector to contract by 4.2% y-o-y in real terms over 2020. This is a downward revision fromour previously positive forecast of 2.1% y-o-y, which is based on the stringent measures being taken in the UK to combat thespread of Covid-19.We have made several alterations to our forecasts for the UK transport sectors, based on the turmoil facing the broaderinfrastructure sector from the Covid-19 pandemic. We note that efforts being made by government to combat the virus will leadto a similar situation as with Brexit, in that delays to decisions, policy formation and investment in the infrastructure sector arelikely as resources are deployed elsewhere. On the upside, the government's rhetoric towards the infrastructure sector prior tothe outbreak was increasingly positive and the national infrastructure strategy poses upside risk to our forecast, although wenote its delay towards the end of 2020.Our Power team notes the sustained growth in the deployment of renewable energy assets, which will offer a concurrentopportunity for grid infrastructure investment, and maintain that the UK will progress with the policy of decarbonisation in thepower sector leading to a continued rise of non-hydro power renewables.We have revised our 2020 growth forecasts for the UK residential and non-residential buildings sector, with the pandemic'simpact set to be most acutely felt in the non-residential sector. This, partly, reflects existing strains on the sector's prospects thathave weighed on the sub-sector in recent years, namely the UK's departure from the European Union, whilst the ultimate impactof Covid-19 on work practice is also weighing on the sector.INFRASTRUCTURE - CONSTRUCTION INDUSTRY FORECASTS (UK 2019-2029)Indicator20192020f2021f2022f2023f2024f2025f2026f2027f2028f2029fConstruction industry value, GBPbn123.1120.2125.8132.4139.2145.7152.6160.0167.9176.4185.3Construction industry value, real growth, % y-o-y2.3-4.22.73.23.12.62.72.82.93.03.1Construction industry value, % of GDP5.65.35.35.45.55.55.65.65.75.85.9f = Fitch Solutions forecast. Source: ONS, Fitch SolutionsRisk/Reward IndexThe UK is the highest-scoring infrastructure market in our Infrastructure Risk/Reward Index for North America and WesternEurope despite the weakening of its score in the context of Covid-19, given that many peer markets are also enduringslowdowns in construction growth.The UK's project pipeline remains strong, particularly as the government has fully supported the High Speed 2 rail project. Thatsaid, an environmental ruling by the Court of Appeal against a third runway at Heathrow Airport, which was another major projectin the pipeline, has dented the market's future opportunities.INFRASTRUCTURE RISK/REWARD INDEX (UK 2020)GeographyRisk/Reward IndexRewardsIndustry RewardsCountry RewardsRisksIndustry RisksCountry RisksUnited Kingdom74.764.969.358.489.492.885.9Note: Scores out of 100; higher score = lower risk. Source: Fitch SolutionsUnited Kingdom Infrastructure Report | Q4 2020fitchsolutions.comTHIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data included in the report are solelyderived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.4
UK Infrastructure Covid-19 ImpactGlobal SummaryThe Covid-19 pandemic marks a pivotal moment for the infrastructure sector globally, with the pandemic and its economicconsequences to have significant implications for infrastructure investment. In the midst of the pandemic we have seen andcontinue to see interruptions of construction works and delays to project timelines due to a combination of supply chaindisruptions and logistical obstacles as a result of lockdown measures implemented by governments. We have also begun to notethe more enduring consequences of the Covid-19 pandemic on key infrastructure trends, which we expect will play out over thecoming years and will have a defining impact on the direction of the industry. These are the result of the massive economicimplications of the Covid-19 pandemic as well as a number of more long-standing commercial, financial, political and demographictrends.Amid an economic downturn in markets globally, infrastructure development will emerge as a key focus of policymakers as ameans to boost employment and support economic recovery, although the ability to increase public infrastructure investmentwill vary greatly among developed and developing markets.Green investment will benefit from infrastructure stimulus measures, with the EU in particular set to link additional infrastructurespending with the European Green Deal agenda.Public-private partnerships and concessions will gain additional attention from policymakers given the potential to boostinfrastructure investment without turning to public spending, although this will also increase the risk of poor projects beinglaunched.The negative impact of the Covid-19 pandemic on the ability of developing markets to take on new debt will lead to a slowdownin China's Belt and Road Initiative, with the focus shifting towards projects already under way and a retrenchment focused onAsia and Africa where China has inherent advantages.Public transit development will remain strong as the demand case for expanded transport options, with a focus on pedestrianand cycling infrastructure,as well as a growing focus on climate sustainability globally will drive policymakers to invest inexpanding transit networks.Country-Specific ImpactWe have revised down our growth forecast for the UK's construction sector for 2020 as a result of the ongoing Covid-19outbreak. Having previously expected solid growth of 2.1% y-o-y during 2020, we now expect the sector to contract by 4.2% y-o-y in real terms.KEY FORECASTSReal GDP Growth, % chg y-o-y2019e2020f2021fGlobal2.6-3.84.0Developed markets1.7-5.33.5Emerging markets3.9-1.64.8China6.11.16.0US2.3-4.93.7e/f = estimate/forecast. Source: Fitch SolutionsUnited Kingdom Infrastructure Report | Q4 2020fitchsolutions.comTHIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data included in the report are solelyderived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.5
Sharp Growth Hit During 2020UK - Construction Industry Real Growth, % chg y-o-y (2019-2024)f = Fitch Solutions forecast. Source: ONS, Fitch SolutionsUnited Kingdom Infrastructure Report | Q4 2020fitchsolutions.comTHIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data included in the report are solelyderived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.6
SWOTInfrastructure SWOTSWOT AnalysisStrengthsThe UK construction industry is the second largest in Europe in value terms, and opportunities remain varied- with transport, residential building and offshore wind being particularly strong sectors.The UK has an attractive project financing environment and is a global leader in structuring private financingfor complex infrastructure projects and public-private partnerships, which attracts global investment funds.The UK has the biggest infrastructure project pipeline in terms of the number of projects and total pipelinevalue in Europe.WeaknessesThe UK has now left the EU, which removes some political uncertainty from the economy, though the shortterm will see private investment continue to be hampered by ongoing trade negotiations and as the UK re-orientates its economy.The UK's housing market is still vulnerable to shocks, and output remains low due to strict planning laws.Project development costs are significant due to land acquisition and compensation, as well as lengthyapproval processes.OpportunitiesThe February 2020 budget announced the government's intentions to provide around GBP640bn of grosscapital investment across transport, energy, and social infrastructure over the next five years.The UK Department for Business, Energy and Industrial Strategy's announcement that the country targetsthe offshore wind sector to reach 30GW and generate 30% of power generation by 2030 paves the way forincreased investment into offshore wind projects.The UK is set to be a crucial market for both the deployment of new construction technologies, as well as amajor destination for energy efficiency as it commits to a 2050 carbon target.ThreatsThe economic impact of Covid-19 will dramatically slow growth in the construction sector for 2020.Prime Minister Johnson will ultimately be willing to make some compromises on extending the EU-UK freetrade agreement (FTA) talks, although there remains the risk of a 'bare bones' FTA or no FTA at all, whichwould amount to a de-facto no-deal Brexit.The Court of Appeal's ruling against the third runway at Heathrow not only jeopardises that project, but willlead to a review of all government planned projects to see whether they comply with the Paris Agreement.A notable portion of the UK construction workforce comes from the EU, particularly so for London; shouldthe access to labour from the EU be restricted, costs and capacity constraints would become a drag ongrowth.United Kingdom Infrastructure Report | Q4 2020fitchsolutions.comTHIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data included in the report are solelyderived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.7
Industry ForecastConstruction And Infrastructure Forecast ScenarioKey View:In response to the impact of Covid-19 on the UK construction sector, we have revised down our growth forecast for2020. The UK's economic slowdown and restrictions on labour movement will undermine the positive outlook we held for growth in2020, although there is significant upside risk for the sector amid a government push to realise an uptick in public investment ininfrastructure and buildings.Latest DevelopmentsWe now forecast the UK construction sector to contract by 4.2% y-o-y in real terms over 2020. This is a downward revision fromour previous forecast of growth of 2.1% y-o-y, which is based on the stringent measures being taken in the UK to combat thespread of the coronavirus.We highlight the UK infrastructure sector, already a growth outperformer relative to the wider economy, as exhibiting furtherupside potential to its outlook amid government efforts to accelerate its existing policy agenda to realise a material uptick inpublic direct investment in infrastructure projects.We do not expect the UK government to be deterred from its ambition to provide a wholesale uptick in public infrastructureinvestment by the economic impact of the pandemic. The government largely views such infrastructure investment, aimed atboosting economic growth across underperforming regions of the country, as pivotal to ensuring the long-term economicprospects of the country, therefore to renege on these commitments would be to put the UK's economic growth potential atrisk.While the delayed publication of the UK's National Infrastructure Strategy, previously scheduled for release alongside the Budgetin March 2020, does not at present have a release date, we note the strong likelihood of the chancellor to provide an update onthis imminently and on the role of infrastructure in any economic stimulus.Similarly, we await further details regarding the potential for the UK's Infrastructure and Projects Authority (IPA) to be placed incharge of project approval for public infrastructure investments. Under the proposals being drafted by the UK government, theIPA would receive project plans devised within government, with which it would review and give a recommendation on theproject's ultimate progression.CONSTRUCTION AND INFRASTRUCTURE INDUSTRY DATA (UK 2019-2029)Indicator2019e2020f2021f2022f2023f2024f2025f2026f2027f2028f2029fConstruction industry value, GBPbn123.1120.2125.8132.4139.2145.7152.6160.0167.9176.4185.3Construction industry value, real growth, % y-o-y2.3-4.22.73.23.12.62.72.82.93.03.1Infrastructure industry value, % of totalconstruction20.121.822.322.923.224.125.025.926.928.029.2Infrastructure industry value real growth, % y-o-y7.74.25.25.74.66.66.46.77.07.27.5e/f = Fitch Solutions estimate/forecast. Source: ONS, Fitch SolutionsStructural TrendsWe have reduced our near-term outlook for the UK construction sector, amid the continued economic fallout of the Covid-19pandemic, and currently expect the sector to contract by 4.2% y-o-y during 2020. This marks a drastic fall from our pre-pandemicforecast for 2020, real growth of 2.1% y-o-y, in which we had expected the sector to benefit from a boost in construction activityfollowing clarity on the UK's departure from the EU. In short, this contraction reflects both the scale of the downturn exhibitedduring Q220 for the sector, combined with the near-term challenges facing the broader economy in its recovery to positive growthUnited Kingdom Infrastructure Report | Q4 2020fitchsolutions.comTHIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data included in the report are solelyderived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.8
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