‘Little or no upside’ to UK leaving EU

Major downside risks to growth in the UK with little or no upside is the view from Timetric’s Construction Intelligence Center (CIC) following the country’s referendum decision to leave the European Union.

Timetric, a provider of online data, analysis and advisory services on key financial and industry sectors, said there was still a great deal of uncertainty as to what the full implications of leaving the EU were for the UK’s construction industry.

It felt, however, that there would a drop-off in new projects and the potential for existing projects in the pipeline to be put on hold or cancelled.

At the UK’s Mineral Products Association (MPA), chief executive Nigel Jackson said that lost economic momentum in 2016 would need to be recouped by minimising uncertainties, by encouraging and boosting both public and private investment, and building confidence as the top priority.

And Kim Vernau, CEO of BLP Insurance, warned that leaving the EU threatened the residential and commercial construction sectors’ continued growth.

She said, “While the industry should not overreact, there is no doubt it will be a tougher market in which to do business until some certainty is attained in terms of any negotiation access to the EU Single market, which remains key, as does flexibility in the labour market.”

However, Lord Bamford, chairman of UK-based JCB, said last week that there was little to fear from leaving the EU.

Timetric’s CIC is a source of data and analysis on the global construction industry. Following the referendum result and the subsequent decision by the UK’s prime minister, David Cameron, to resign, the CIC made an initial revision to its forecast for growth in the construction industry in 2016.

The CIC now expects growth of 2.8%, which is down from the previous projection of 3.4%. The higher figure was based on the assumption that the result of the referendum would be in favour of remaining in the EU.

Downturn in investment

Timetric said that the pace of growth in the UK’s construction industry would then slow to 1.5% in 2017 – down from 4% previously. It said this reflected a sharp downturn in investment as the UK government embarked on the two-year process of negotiating its exit from the single market.

It added that the timing of the government’s decision to invoke Article 50, which begins the process of withdrawing from the EU, was crucial in terms of determining exactly when the UK would be formally outside of the EU, but it felt that the negative impact on investor confidence stemming from the uncertainty over how the UK economy would perform outside the single market would “weigh heavily on the construction industry” during this period.

It predicted that investors would also take steps ahead of the formal exit to ensure that they were protected from any negative fall-out, and this was 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.

Assuming that the UK would be out of the EU formally by 2019 with a clear picture having emerged on the post-EU trading environment, Timetric said that investment was likely to pick up again as new opportunities became apparent.

“However,” it said, “there is little prospect of a surge in new activity at this time, as the UK is not expected to be in a position of strength to strike a deal that is favourable with respect to the EU.”

Foreign labour

Timetric also pointed out that the UK’s construction industry was currently reliant on foreign labour from within the EU, owing to insufficient numbers of new and existing skilled domestic workers.

It said that ahead of the referendum, the UK’s Chartered Institute of Building had warned that tight regulation of migration would damage construction activity in the UK. Reduced access to skilled workers from the EU could exacerbate the skills shortage, potentially delaying projects and increasing labour costs.

The industry is also reliant on the import of construction materials and equipment from EU countries, in particular Germany, Sweden and Italy, Timetric said, indicating that in the post-EU trading environment, the construction industry could face higher costs for key inputs in construction.

“There is still the potential for the UK to negotiate trade deals outside of the EU, but there is no guarantee as to whether these deals will be more favourable with respect to the goods and services required by the construction industry,” it said.

Timetric added that there would also be direct consequences in terms of the loss of future funding from EU sources for major projects in the UK.

“The European Investment Bank (EIB), which is the EU’s bank and operates in the interests of EU member states, increased its lending to UK infrastructure projects to €5.5 billion in 2015,” it said.

“The UK has also received funds from the EU’s European Fund for Strategic Investment (EFSI), which is aiming to provide €315 billion in infrastructure investment across the continent. According to the UK’s Infrastructure & Projects Authority, the UK has been the second-largest recipient of funds under the EFSI, which has supported projects including smart meters and offshore wind projects.”

Political instability

Timetric forecast that the heightened political instability following the referendum, not least in terms of who will be the next prime minister, also meant that some major infrastructure projects could be put on hold.

Although Timetric said it was not currently forecasting that the UK economy would fall into recession, a slowdown in household spending and business investment, including the potential for an outflow of foreign capital, could result in a sharp deceleration in economic growth, curtailing activity in residential, commercial and industrial construction projects.

The MPA said before the vote that it believed that a significant price would be paid, whatever the outcome, in terms of muted growth and political instability in the short term. It said this now appeared to be the case.

It said impacts for the longer term would take time to evaluate as the UK’s new place in the world and role in Europe, and relationship with the EU, evolved.

The MPA said it was critical to affirm the UK’s international reputation and influence, to ensure that it remained one of the largest economies in the world, the second largest in Europe and “an attractive place for inward and domestic investment”.

It said lost economic momentum in 2016 would need to be recouped “by minimising uncertainties, by encouraging and boosting both public and private investment and building confidence as the top priority”.

Resilient and continuous supplies of essential mineral products would be important, it said.

Exchange rate drop

Vernau at BLP Insurance said, “The drop in the exchange rate between Sterling and the Euro will adversely impact the costs of materials from Europe for the construction industry.

“Coupled with the uncertainties of access to free movement of labour and the fact that London may not prove as attractive a location to financial services businesses should we lose our passporting rights, there is a considerable challenge to the continued growth of residential and commercial construction sectors in the UK.”

She added that some could argue that leaving the EU could, in part, be masking a re-alignment of the sector that would have taken place in any event.

“However this referendum result will exacerbate the negative effect of that re-alignment process,” she said.

“The industry now needs to focus on moving forward, united in ensuring both residential and commercial sectors remain attractive as an investment, both domestically and internationally.”

‘Look to the future’

JCB’s Lord Bamford said, “In light of the UK’s vote to leave the European Union, the business community now needs to look to the future.

“The UK is the world’s fifth largest trading nation. We therefore have little to fear from leaving the EU. European markets are important to many UK businesses, including JCB, and this will not change.”

He added, “As a consequence of this momentous decision, we should look ahead to opportunities to trade more freely with the rest of the world, as well as building on existing trading relationships with customers and suppliers in Europe.”

Also last week, the UK Construction Equipment Association (CEA) said its members would have been “surprised and disappointed” by the result.

Rob Oliver, CEA chief executive, said, “All CEA members will now have to contend with a further period of uncertainty which will be bad for business.

“International companies will have to make some key strategic decisions on future investment in the UK and our exporter members will have to contend with exchange rate volatility which is already impacting on the CEA's overseas trade promotion programme.”

He said, “Our partners within CECE (the Committee of European Construction Equipment) I know are deeply disappointed by the turn of events but the CEA remains committed to continue to work with CECE as future access to the EU market remains pivotal.”