There is a great deal of uncertainty in the UK construction industry following the June 8th General Election. Timetric’s Construction Intelligence Center maintains its current modest outlook for the industry, which we have held since the outcome of the 2016 referendum to leave the EU, and we expect to see a slight contraction in real terms over the year. We caution that risks to this outlook remain firmly to the downside, as the industry faces a period of uncertainty given the weakened position of the Conservative government to implement its domestic agenda, the beginning of the UK’s withdrawal from the European Union (EU), and rising costs due to ongoing currency weakness.
At the time of writing, it is unclear whether the Conservative Party will be able to effectively govern, given that it does not hold a working majority in the House of Parliament, or whether Prime Minister Theresa May will be able to maintain the confidence of the House of Commons and remain leader of the party. This will become clearer over the coming days and weeks, but investor uncertainty is expected to continue over the coming months as passing legislation will be more difficult for the party, and the process of the UK’s withdrawal from the EU begins.
The UK government triggered Article 50 in March 2017, signalling the onset of the formal process to leave the EU, but there is much uncertainty over the final outcome of the exit negotiations. Timetric believes that this process will be hampered by the outcome of the June election; in the best case scenario of a weak Conservative government, the UK’s bargaining position is weakened as the government may struggle to adopt and negotiate a position. In the worst case scenario, the process of withdrawing from the EU may be delayed, and many businesses would hold-off or rescind investment decisions. Timetric believes this is unlikely, however, and we expect the process to begin in June.
The industry faces other difficulties. Following ongoing weakness in the pound, the construction industry has faced rising prices for imported materials. This issue has reportedly been compounded by increased forward purchasing of materials, which has reduced stocks among suppliers. This trend is likely to continue over the coming months.
According to the Office for National Statistics (ONS), construction output in April 2017 (the latest data available at the time of writing) declined 1.6% month-on-month (m-o-m), driven by falls in both repair and maintenance, and all new work. The decline in all new work in April 2017 was somewhat offset by a sizeable rise in infrastructure, which grew by 5.7% compared with March 2017.
Over the first quarter of 2017, construction output increased 1.1%. New orders increased by 0.7% in Q12017, following 2 quarters of decline. This increase was driven by rises in both private housing and private commercial work. While the UK’s construction industry has performed relatively well in the opening months of 2017, there is still much uncertainty surrounding the short and medium term outlook, and Timetric expects to see a decline in output figures in the coming months.
For now, the CIC maintains the view that investors will take steps ahead of the formal exit to ensure that they are protected from any negative fall-out, and this is likely to mean a drop-off in new projects and the potential for existing projects in the pipeline to be put on hold or cancelled. With such downside risks, the CIC projects a marginal contraction in UK construction output in real terms in 2017 of 0.5 to 1%.