The inflation bubble will burst, but are labour constraints here to stay?

Graham Harle is chief executive of Gleeds Worldwide

Surely 2022 should be the year in which the developed world learns to live with COVID-19? High levels of vaccination have helped weaken the link between case rates and deaths in richer countries and, despite spreading at lightning speed and generating record case rates, the Omicron variant has been less damaging to health than previous waves. We are seeing projects being thawed out and restarted, and the share value of major developers is starting to rise. There has been a realignment in the property sector away from retail and towards a burgeoning mixed-use and logistics-related market with rail, energy, health and education still offering great opportunities.

“I predict a return to ‘normality’ in terms of the flow of materials fairly soon”

Another reason for optimism is that the pandemic has inflicted less damage on the economy than first feared. Strong government intervention in the form of debt-financed spending cushioned the shock of the downturn in a way never seen before in a postwar recession.

Unemployment rates fell in most countries last year and in the UK the furlough scheme, bounceback loans and the stamp-duty holiday helped those of us operating in the built environment.

Supply bottlenecks

However, while the two-year hiatus caused by the pandemic has had remarkably little effect on growth, it has had a large effect on inflation. The on-off pattern of production and consumption resulting from the virus has created supply bottlenecks, backlogs of orders and queues at ports. The consequent mismatch between supply and stimulus-fuelled demand has pushed inflation sharply higher. Nowhere has this been felt more acutely than in the construction sector, where lead times for vital materials such as steel, wood and bricks have gone off the charts.

Inflation has gone from near-zero rates in late 2020, to the OECD group of rich economies reaching a 25-year high in November 2021. In the US, inflation hit 7 per cent in December, a 40-year high. If the pace of price rises is sustained, the reasoning follows that central banks will be forced to raise interest rates aggressively. In turn, this will hit investment, and key asset classes like property could be the big losers in that scenario. Developers planning for return on investment over the long rather than short term obviously prefer cheaper borrowing costs.

That being said, some blockages in the system are starting to ease. I predict a return to ‘normality’ in terms of the flow of materials fairly soon, as China, one of the world’s key consumers of building supplies, starts to rein in construction, particularly of residential property. This may well mean that global demand will level off. The cost of shipping freight and bulk natural gas are also down from last year’s peak. Delivery times in US manufacturing are no longer increasing. Pent-up demand will fall away this year. We can expect a few rough months ahead but, by summer, inflation rates should be on a downward path.

Long-term labour issues

The supply of labour is set to be a longer-term worry, however. More young people are prolonging education or taking time out. Among those in work, rates of retirement and sick leave have risen. Pandemic-related disruptions have slowed the international movement of people and caused some foreign-born workers to return home, further squeezing labour supply. Unemployment is likely to fall further this year, tilting the balance of power in the labour market further in the direction of workers. This will affect salaries in our sector, with demand outstripping supply. Whether those increased costs are passed along to nervous clients, who are watching interest rates carefully, has yet to be determined.

All in all, this looks set to be a year of good global growth and gradually falling inflation. There are far more reasons to be cheerful, early in 2022, than we might have expected at the close of a grim 2021.

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