Construction industry insight - May 2017

Our review of 2016 called it right. Uncertainty was the watchword in 2016 and respite in 2017 has, in the first five months at least, been in short supply. With Article 50 now triggered and a snap General Election taking many by surprise now seems as opportune a time as any to take the temperature of UK construction and look to the months ahead.

The UK economy

Growth

That referendum result added more uncertainty into the mix making projections tricky.

Between 2012 and 2016 the UK enjoyed increases in GDP output between 1 and 3%. In August 2016, the Bank of England's Monetary Policy Committee (MPC) issued what it called "the largest revision to our GDP forecast since the MPC was formed almost two decades ago". The bank's wide band projections at the time suggested percentage increases in GDP would range between -2 and +3 by the start of 2017.

In actual fact, come February 2017, the Bank said "growth has remained resilient since the referendum, with the UK posting the fastest rate in the G7 last year". The wide band projections were revised to show an expansion of 2% in 2017 and 1³/4% thereafter.

The devaluation of sterling

A sliding pound has been one of the most clear impacts following last June's referendum as the Bank of England's Ben Broadbent explains: “Sterling’s decline was clearly prompted by the referendum result. It also seems likely that the foreign exchange market has decided the consequences are negative. The most plausible explanation for the depreciation is that, in the eyes of the market, leaving the EU will make exporting harder and more costly. To help compensate the currency needs to be cheaper."

Here the UK has some history. The ejection from the European exchange rate mechanism saw the currency fall 18%. With growth averaging almost 3% over fives years from 1993 and exports growth higher than imports (at 7.7%) the combination quickly eliminated Britain's deficit. In contrast, the five years following the 2010 financial crisis came with a 25% depreciation, growth of 1.9% and imports rising faster than exports. The result? The deficit grew from 2.7% to 4.6% of national income.

Which kind of adjustment can we expect this time?

Higher inflation (with average projections suggesting a 2 to 3% increase each year to 2020) along with rising prices will undoubtedly bring challenges but there are reasons to be optimistic too:

• The Autumn statement indicated an easing of austerity measures
• The global economic outlook is looking better than it did last year
• A weaker pound and low interest rates are helping the economy
• Consumer confidence remains strong (household spending has held up in spite of wage settlements not keeping up with inflation).

WTO figures show the UK relies on the EU for 44% of its trade flows (with America making up 17% of the total). With this in mind it's back to the Bank of England for thoughts: "Ultimately, the biggest determinants of the UK’s medium-term prosperity will be the country’s new relationship with the EU and the reforms that it catalyses. Some of the adjustments to this new reality may prove difficult and many will take time. But the UK can handle change. It has one of the most flexible economies in the world. It benefits from a deep reservoir of human capital, world-class infrastructure and the rule of law. Its people are admired the world over for their strength under adversity."

Construction output

Pre-referendum the UK's construction sector was in a strong position and set to rise to become the world's sixth largest construction market, overtaking Canada and Germany to also become Europe's largest construction market.

Latest Office for National Statistics figures show industrial and construction output declined for the third consecutive month in March. Builders and manufacturers have been reporting higher expectations of growth and increased export orders in surveys; by contrast, the ONS found that output declined in those industries in every single month of the first quarter. Infrastructure and repair and maintenance drove the fall, whereas housebuilding continued to grow.

On a sector-by-sector basis we can expect modest growth in the coming years in housing, continued growth in education (spurred by the Priority School Building Programme and work in the Higher Education sector). Infrastructure has proved to be a strong performer with significant year-on-year-growth, but there's starting to be evidence of jitters, while commercial projects have undoubtedly contracted, in part as a result of the Brexit decision.

Looking ahead uncertainty will continue to be felt, particularly around the outcome of Brexit negotiations. In uncertain times we can expect impacts in terms of investment, the cost of materials and the availability of labour.

A changing world

The last few years have certainly been tumultuous. A global financial crisis has led to a Sovereign debt crisis and the end of the commodity super-cycle. We've also experienced political and social changed that feels monumental and a worsening of the growth/inflation mix. Could the next logical step be support for de-Globalisation and a more inward-looking approach?

While it's easy to concentrate on more recent events and the impact(s) they have on our sector, but there are broader trends that are also important that will also have effect. WTO figures suggest significant improvements in life expectancy (48 in 1950, 71 in 2015), literacy (36% in 1950, 85% in 2014), and GDP per Capita (450 USD in 1960 - 10,000 USD in 2015 (current prices)). A growing, more literate, prosperous population bring both challenges and opportunities.

What does all this means for construction industry professionals?

Construction plays a key part in the global economy so it is inevitable that we've been impacted. As you would expect the NBS research team have consulted extensively and their current appraisal follows.

• The UK's current EU integration will take time to untangle as it is so pervasive and reaches far and wide into the ability of UK construction's ability to perform effectively.
   
• In terms of trade, we currently take for granted the ease by which we can work on projects in EU countries, and freely trade with member states. Core standards mean its also taken for granted that we can safely use European products in the UK.
   
• Freedom of movement has also provided the construction industry a ready supply of construction specialists. Moreover, our research has found that staff from other countries have brought a richness, diversity and a range of perspectives to our projects.

So far we've seen impacts in a range of key areas:

• Workforce - Many staff from the wider EU were left feeling worried and unwelcome.
  
  
• Workload dipped as caution became the watchword - with some EU projects put on hold, and others drying up entirely. There's evidence that this picked up towards the end of 2016, though some still say that clients are still holding back.
   
• In terms of trade, Sterling's devaluation means the cost of materials have increased and those involved in construction are having to take the difficult decision of whether to absorb increases or pass on costs to customers.

Uncertainty remains the watchword but it's something that construction professionals are used to:

• We've weathered the boom in the 1990s and the bust in 2008.
• We've always been susceptible to the waxing and waning of policy initiatives such as New Labour's investment into public buildings where too much money, too quickly and a new procurement approach found design squeezed.
• We're getting to grips with new technologies - the road from the drawing board to CAD and BIM and beyond into artificial intelligence and the rise of the robots - and what this means for our job roles.
• We're used to dealing with skills shortages.

The Government Construction Strategy set us on the path to lower costs, lower emissions, faster delivery and an improvement in our exports (with a reduction in the trade gap between total exports and imports for construction products and materials). As we grapple with how to deliver on these ambitions there's a growing market for architectural services and expertise worldwide. Back in 2009 architectural service exports totalled £302m and by 2015 had risen to £435m. Digital construction affords us opportunities that the UK can approach from a position of strength however uncertain what lies ahead.