Can we achieve economic growth via investment or will growth via debt continue?
With the vote to leave the EU having caused a high degree of uncertainty for construction and the UK economy, and a new Government beginning to settle in, I attended the CIMCIG seminar where Martin Hewes of Hewes & Associates, was presenting his forecasts on the Construction outlook for 2016-2018 following the Brexit vote. My aim was to understand the level of uncertainty that the vote had caused and what its effects would be across construction and the wider economy.
To start with Martin explained his 3 points relating to the Brexit vote that are important to construction and the UK Economy.
Firstly the housing market has led growth in construction over the last few years, but can it keep growing at the pace it has been or will it stabilise as we inevitably enter a mild recession following Brexit?
The second point he makes is that as a consequence of Brexit we effectively have a new Government and potentially new policy. Will they deliver on the previous promises around infrastructure investment, or will it all be just talk with a shortage of cash available to invest? And if the government do decide to invest further in housing and infrastructure can this cause growth of the UK economy via investment?
This follows onto the third point; can the UK economy continue growing via debt or will the only way the economy can realistically begin to grow again be through investment? And this is where investment in infrastructure could become a leading factor in how the economy and construction may grow over the next few years.
Moving onto the macro economy, Martin asks can we achieve growth via exports. This could possibly be achieved as the weaker Sterling is good for manufacturers exporting to key economies such as China and America, making their products more appealing as they become cheaper. The weaker Stirling will also begin to stir foreign investment, which could push forward growth via investment rather than debt. He also pointed out that the proportion of UK exports to Europe has declined in recent years due to the recession on the continent, slightly reducing the impact of the exit from the EU.
We are next pointed to the fact that even before the referendum; GDP was already on a downturn showing slower economic growth, contributing to the housing crisis. Martin considers that we do have a housing crisis but, is it not more of an affordability issue, as not enough people can actually afford to buy their homes. This could also worsen as the growth of construction was led by residential housing and is now set to slow over the next couple of years, although Government support of housebuilding has increased with more than 50% of completions receiving funding.
Infrastructure is now forecast to decline slightly over the next few years, as Brexit creates uncertainty in this area, although it will make very little difference to the Government’s public investment. On this note Martin doesn’t think that the Hinckley power station project will get off the ground anytime soon as it relies too heavily on foreign investment and funding.
The commercial sector is set to be most affected by Brexit, this having a greater impact for the office sector compared to other parts of commercial work. We were also reminded that retail was already in decline prior to the referendum and this will remain in decline, at least in the short term.
Overall construction costs are rising while inflation remains flat, which is an issue for construction as it will reduce the affordability of many projects, unless the costs can be passed on further down the line.
In summary, the overall state of the economy and construction is that there will be a mild recession with around 1% decline in GDP for 2017, and a 3% contraction in construction for 2017. The construction decline is going to be impacted the most by the housing, infrastructure and commercial sectors not being as strong as they have been over the last few years. And that housing has the most uncertain future out of these sectors, as there will be no growth without investment in social housing.
A copy of Martin Hewes’ slides from the presentation can be viewed here.
Michael Prince is Research Manager at Competitive Advantage Consultancy Limited which specialises in market research and training for the construction industry.