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February 27, 2017

Constructing a Greater Britain – The Construction Industry, Brexit and the Future

The last twelve months have witnessed major changes, politically and economically, both at home in the UK, within the EU and internationally.  Citizens of two major economies have made their voices heard resulting in the unlikeliest of outcomes becoming a reality.  The after effects have been felt internationally with economies, trading markets and financial investments having to acclimatise to a more volatile and unpredictable global environment. 


Within the next twelve months the citizens of three more major EU countries will have the opportunity the make their voices heard.  The UK will also formalise its impending exit from the EU, which is now likely to be ‘hard’ and complete.  These events will all significantly contribute to the overall economic health and stability of the UK and EU as well as the future of the EU itself. 


Combining the events of the previous 12 months and possible outcomes of the impending 12 months means the relative economic and political stability that has been enjoyed in recent years is unlikely to be returning for the foreseeable future.  But what does this mean for the UK economy, particularly the construction industry?


By the Numbers


To answer this, we need to look at how the construction industry has been performing, and is predicted to perform, in the short and medium term.  Let’s look at the numbers.


The Office for National Statistics state the output of the construction industry rose by 1.8% in December ’16 compared with November ’16.  This was largely due to an increase in new work in the Private Commercial sector which accounted for 1% of the total 1.8% increase.  Indeed, the Private Commercial sector has seen steady growth in new work with an upward trend for the last twelve months. 


The value of the Private Commercial sector for December ’16 was £2.24 billion which is an increase of 8.2% on December ’15.  The value of the construction industry as a whole in December ’16 was £11,498 billion making the Private Commercial sector one of the largest sectors, second only to Private New Housing.  It is encouraging that it is still performing well, post-Brexit, growing 5.2% in December ’16 compared to November ’16. 


However, Private investment in the industry is dependent on the overall economic state.  In a strong economy, there is money to spend and Private investment budgets are healthy.  Projects are greenlighted as companies are happy to invest in a strong economy.  In a weaker economy, the opposite is true.  The key to maintaining a strong construction industry, like many other industries, is the commitment of the UK government to its planned spending. 


The Backbone of the Construction Industry


The fortunes of a post-Brexit construction industry will heavily depend on the government’s commitment to honour planned spending on major infrastructure projects.  The Infrastructure sector is valued at £1.48 billion for December ’16, that’s down 10.2% on December ’15 but up slightly by 0.2% on November ’16.  While it may not currently be as high value as the Private Commercial or Private Housing sectors, it is forecast to contribute almost half of the predicted growth, 45%, of the construction industry for the 2017-2021 period according to current CITB numbers. 


Infrastructure projects become even more important in weaker and more volatile economic environments.  The projects are usually critical in keeping a country operating efficiently, maintaining economic growth and meeting the demands on the population in terms of utilities, transport etc.  They are also funded by state resources rather than Private investor money making it, difficult, if not impossible, to abandon and are unlikely to be postponed because the economic climate is unfavourable.  As mentioned before, this is unlike Private investment projects.


To highlight how important government spending will be to the construction industry, post-Brexit, let’s look at the numbers again.  The UK government is projected to spend £100 billion on infrastructure projects between 2017 and 2021.  The majority of that is being spent on Hinkley Point C Nuclear Power (£18 billion), Wylfa Newydd Nuclear Power (£14 billion) and HS2 Rail Link (£55 billion) with £13 billion being spent on other projects. 


Any delay or cancellation of one or more of these major infrastructure projects would have a significant effect on the whole construction industry, not just its individual sector.  For example, if Hinkley Point C was cancelled it would cause a 0.8% reduction in the growth of the whole construction industry!  This is why government spending on infrastructure is critical for the future health of the construction industry. 


Home is where you build it


It is also worth remembering, Britain still has a housing shortage.  In July ’16 a cross-party House of Lords Committee advised that the government needed to build 300,000 new homes each year.  The government has set a target of building 1 million new homes by the end of this parament, that’s the equivalent of 200,000 per year.  It has been ten years since that many new homes were built in one year, in 2015 only 142,890 were built. 


On these numbers the need for housing will only become more acute.  More housing projects will be planned and delivered and in turn this will require further spending on government infrastructure projects to support these new developments.  This will also generate a need for more Commercial construction projects in or near these areas for the residence of these new housing developments. 


Committed to the Future


The UK construction industry remains strong after the Brexit vote and while forecasts maybe be being revised down in some areas, overall the situation is favourable.  No doubt there will be tougher times ahead once finer Brexit details are confirmed.  However, if the government remains committed to boosting the UK economy and their spending on infrastructure this should help underpin the construction industry and minimise any reduction in Private Commercial projects. 


In conclusion, for now and for the foreseeable future, the construction industry looks solid.  But this is dependent on political will, commitment and the overall economic environment this creates both at home in the UK and in the EU. 



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