The UK construction industry is expected to experience major downside risks to growth following UK’s vote to leave the European Union, according to a new report.
Timetric’s Construction Intelligence Center (CIC) new report, entitled ‘Brexit and the Impact on Construction in the UK’, concluded that the UK construction industry growth is expected to fall from 3.4% to 2.8% this year.
The findings reveal the great deal of uncertainty as to what the full implications of Brexit are for the UK’s construction industry.
Danny Richards, leading economist at CIC, recognizes that the industry growth started being affected during the EU referendum campaign.
“Construction output growth had already started to slow ahead of the referendum, in fact output was down by 1.9% in the first quarter on a year-on-year basis, and the uncertainty that will prevail in the coming months following the referendum suggests that investment flowing into new projects will slowdown, and some works could be put on hold,” he said.
Furthermore, the pace of growth in the UK construction industry in 2017 is expected to slow from 4% to 1.5% — reflecting a sharp downturn in investment as the government embarks on a two-year process of negotiating its exit from the single market.
“The downwards revisions to our growth forecasts for construction output mean that the UK’s construction industry’s output in 2017 will be £4.8bn lower than what it would have been had the outcome of the referendum been in favour of the ‘remain’ campaign,” said Richards.
Potentially higher costs for labour and materials
The UK construction industry is currently reliant on foreign labour from within the EU due to insufficient numbers of new and existing skilled domestic workers.
With the referendum outcome, the access to skilled workers from the EU could be reduced, exacerbating the skills shortage and potentially delaying projects and increasing labour costs.
However, Richards believes that this scenario will depend on how successful the negotiations with the EU will be.
“It still very much depends on how successful the UK will be in negotiating favourable terms for trading with the EU post-Brexit.
“If the outcome is a relatively unfavourable deal with respect to the trade in key inputs into the construction industry, then it would have a direct impact in pushing up project costs,” he said.
Richards continues: “At present, the likelihood is that growth in the UK’s economy will slow sharply in 2016-2017, but there is a high risk of recession if investors are unnerved by further political uncertainty.”
Additionally, the industry could face higher costs for key input in construction, as the UK is reliant on the import of construction materials and equipment from EU countries.
Pessimism among housebuilders
The housebuilding sector was also affected by the referendum outcome. Hours after the Brexit confirmation, the housebuilders were among the worst affected in terms of the decline in their share prices.
Prior to the referendum, the UK Treasury suggested that house prices could fall by up to 17% due to Brexit, and a group of 17 of the UK’s biggest housebuilders reported that Brexit would inevitably reduce the amount of housing being built, due to labour shortages and increased import prices, together with reduced demand for property from overseas investors.
“The UK still faces a shortfall in housing, so demand for underlying demand for housing will remain. However, housebuilders may slow down the rate of expansion in new housing if margins are squeezed,” said Richards.
Infrastructure to lose key source of funding
There will also be consequences regarding the loss of future funding from EU sources for major projects in the UK.
The European investment bank (EIB) increased its lending to UK infrastructure projects to €5.5bn in 2015 and the country has also received funds from the EU’s European Fund for Strategic Investment (EFSI) — the country is the second-largest recipient of EFSI funds, according to UK’s infrastructure and Projects Authority.
The political instability verified after the referendum with the resignation of Prime Minister David Cameron also means that some major infrastructure projects could be put on hold. As an example, the Heathrow Airport expansion plans are supported by David Cameron, but opposed by Boris Johnson — leading member of the ‘leave’ campaign.
Furthermore, the UK has fallen six places in the latest update of Timetric’s Construction Risk Index — it is now ranked 15th out of 50 countries in the index.
“The UK being downgraded to a B1 rating in the risk index means that the construction industry is facing some headwinds from country-level issues, and operators need to be prepared for the potential for disruption,” said Richards.
The international ratings agencies have also demoted the UK’s sovereign credit ratings. Standad & Poor’s has cut the UK’s rating from AAA to AA and it also warned that further downgrades could be forthcoming reflecting the likelihood of a weaker and less effective policymaking environment in the UK and the negative impact this will have on the economy and fiscal and external balances.
* For more information about the construction industry, visit the Construction Intelligence Center.