Brexit and the Construction Industry
Brexit continues to cause changes to the UK construction industry, with impacts ranging from a freeze/slowdown in trade to the decreasing availability of construction workers from overseas. The risky construction sector is showing contraction due to the longer-term uncertainty.
The UK construction sector is starting to feel Brexit consequences
There is a lot of uncertainty over the exact leaving terms of the UK and construction is one of the most vulnerable sectors. Firms have to invest large amounts upfront, so the current trend is to delay spending decisions rather than investing in a risky environment. The consequences of a disorderly Brexit for all aspects of the construction business drove the investment down during 2018. The fact that this happened outside of a general recession only enforces the negative sentiment that Brexit has brought over the sector. Construction is a risk- and cost-intensive sector with long-term projects, and as a consequence, it can be an indicator for the economy as a whole.
The barometer for the industry’s downward trend is the IHS Markit/Chartered Institute of Purchasing and Supply (CIPS) Construction Purchasing Managers’ Index (PMI). It measures the activity level of purchasing managers in the construction industry and shows the general economic climate. It is of importance since construction is a significant driver for economic growth. According to the Government Construction Strategy, the sector has expenditures of £110bn per annum, making up around 7% of the United Kingdom’s GDP. Around 40% of all the expenses are public; namely, the UK government being the industry’s biggest customer.
Development of the index
The index has now dropped to 43.1 in June, which is the lowest level since April 2009, a time when the financial crisis hit the industry massively. From 50.5 in April it fell to 48.6 in May and crossed 50, which is the critical level to determine whether the sector is in contraction.
The 2016 Brexit referendum gave a significant negative boost to the PMI sending it to just above 45. However, there is an overall downward trend since 2014. Looking at other European nations, it becomes evident that Brexit is unilaterally damaging the UK: The PMI figures for France, Germany and Italy are relatively low with 52, 50 and 51 points respectively.
Consequences of Brexit uncertainty for workers
According to Statista, there are about 2.7 million people employed in the construction industry in the UK. The Royal Institution of Chartered Surveyors (RICS) estimates that EU nationals account for approximately 8% of the UK’s construction workers. This figure is significantly higher in the capital: 28% of London construction workers are migrating from EU countries according to Sarah McMonagle, Director of External Affairs at the FMB Federation of Master Builders. However, a number of EU nationals working in the sector are expected to be leaving. Recruitment firm Randstad’s survey found that a third of EU nationals who are working in construction have already considered leaving the UK. This expected shrinking pool of EU workers is believed to drive up wages in a sector; that has already seen a pay increase of 9% for an average job since 2017.
European links (of UK construction)
Not only is the UK closely tied to the EU when it comes to workers, but the relationship also involves the substantial exchange of goods. It is estimated by the Department for Business, Innovation and Skills that almost two-thirds of building components and materials are imports from the EU. Possible tariffs, higher tax rates and quantity limits can mean that the trade will be more costly after Brexit. Civitas, the Institute for the Study of Civil Society, has found in its research that tariffs imposed upon exports from the EU into the UK could be as high as €15 billion and such cost increases would likely be passed on to customers. Even now, the effect of Brexit stockpiling by manufacturing companies has brought a decreased supply of raw materials. This, in turn, has led to a deficit in building capability and willingness according to Financial Times interviewees.
Furthermore, there is €7.8bn worth of investments in major infrastructure projects that are funded by the European Investment Bank and the European Investment Fund. It is unclear to what extent such institutions will be providing capital in the future. The fact that they are additionally lending over €600m to UK SMEs per year is only making the situation worse from the standpoint of investment into the sector.
However, the negative trend could only be temporary. There has been higher demand in commercial construction (making up 45% of the whole sector according to the Government Construction Strategy). According to Deloitte Real Estate survey data, the city saw its highest demand for office buildings since 2016 in the last 6 months and the number is an increase of almost 40 per cent from the previous period. The total office space in London is 13.2m square feet now and has increased by 12% since the last survey, with 37 new developments having been started. These numbers show that there is still confidence among investors in the UK property market.
Considering all of the mentioned points, one cannot stress enough how uncertain the situation in the UK’s construction sector is. The big changes in terms of material imports and worker migration have yet to take place, but it is hard to ascertain how exactly Brexit is going to affect the construction industry without a clear exit strategy.