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Monday, 14 November 2016

The uncertainty of Brexit and the impact it is having on the Construction Industry

With the headlines full of the recent ruling against the government in the latest segment of the Brexit saga (pre results of the US Election), I wanted to think about what it will mean for the construction industry and what it already means.

In the wake of the Brexit result, I was at a networking event where the main speaker touched upon Brexit - a topic people were keen to avoid in order to minimise the risk of an argument or upset. The speaker had one clear message for the industry: "We must not talk ourselves into a recession". So far, so good. We seem to be doing ok. There are mixed reports regarding the housing market but projects are going ahead and redundancies aren't widespread in the industry. Which is obviously great news, but with projects such as Hinckley Point C going ahead, the decision on the Heathrow expansion one step further, it should make us question where we are going to get the labour from in a post Brexit Britain. 

Whilst there is no immediate effect in terms of law and visa retrictions, EU migrant workers have started to move back home unsure of how the next few years will pan out. The result of this may be that we see a drastic change in the make up of the construction industry. The main concern around Brexit is that the UK may lose access to the single market, a key provider of construction labour. It is estimated that 15% of the current construction workforce is European labour.

A further shortage of labour, in addition to the pre-brexit figure of 182,000 vacant construction jobs, would likely mean a rise in wages across the industry. As I mentioned in a previous post, the rail industry has already seen huge wage rises due to shortages of workers and engineers building new lines and tunnels resulting in a staggering increase of 74 per cent between 2012-2015.

And its not only a shortage of labour that is affecting the Construction Industry. We are already seeing an increase in costs of materials as a result of the weak pound. Steel prices are on the increase, as are costs of any materials imported from abroad and this means now that any variations on existing projects are likely to cost the contractor and the client more as costs are passed on. The result being that projects risk going over budget and an increased risk of projects being put on hold.

This kind of wage increase in conjunction with the rising cost of materials and the projected flat lining of growth within the sector for the fourth quarter signals an increased likelihood of problems for the weaker players in the industry. However it is by no means all bad news.

The uncertainty post Brexit was thought to signal doom for the industry. However there are several positives to come out of it. 
1. Housing: Inward investment due to the weak pound means that UK property is cheaper to overseas investors, meaning there is still the demand for UK property not only from domestic buyers but also foreign investors. The housing market saw an increase in growth in the third quarter of 2016 which has propped up the industry as a whole. With the government falling behind on their target of 1 million homes by 2020, the autumn statement should provide the sector with the boost it needs to stimulate growth with announcements likely to include plans for more local authority house building as well as build to rent homes. 
2. Infrastructure Projects: With the confirmation of infrastructure projects such as Hinckley Point C and the Heathrow expansion as well as HS2 and Crossrail 2 in the pipeline, even more jobs are being created. Whilst there are issues around this because of a shortage of labour, this is still a significant boost to the construction industry with these projects said to be worth around £400m. This will be especially beneficial in the areas where HS2 and Hinckley Point C are going ahead for job creation.
3. Is there scope for a deal with the US in this new Trump era? Only last month, Trump representatives claimed Britain will be offered a free trade deal before the rest of the European Union if the Republicans win the US presidential election, which they have. As with Brexit, only time will tell what the outcome of trade deals between the UK and the US will be but depending where you sit, this could be good news.
There is no definitive answer as yet and it is unlikely that there will be for some time until Article 50 s triggered, negotiations get under way and eventually conclude. Until then, it is important to keep the words of the speaker in mind... "We must not talk ourselves into a recession".

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