The Bank of England’s decision to cut base rates last week, alongside renewed quantitative easing, is designed to help stabilise the economy.
With interest rates now pegged below inflation, cash reserves will simply shrink in real terms unless put to use.
“While industry waits to learn where the Treasury is heading, few will be prepared to take any really big plunges.”
If the cut has its intended outcome, investors could become more likely to view construction and infrastructure development as potentially profitable ways to put their money to work over the long term.
However, interest rates are only one component of the decision-making context. The chancellor Philip Hammond has indicated that he intends to “reset” fiscal policy with his Autumn Statement. While most expect Mr Hammond to abandon his predecessor’s focus, what policies he might pursue instead remain unclear.
What next from the Treasury?
Tax cuts, VAT adjustments, investment incentives and an updated National Infrastructure Pipeline might all be on the cards. While industry waits to learn where the Treasury is heading, few will be prepared to take any really big plunges.
While the Bank of England strives to accelerate investment, the government appears to be pausing. Last month’s 11th hour rethink on Hinkley – while some would say fiscally logical – further reinforces the view that, for now at least, business as usual means wait and see.
The other three ‘Hs’ – namely housing, Heathrow and HS2 – all need clearer commitments from the government.
“The consequent pressure could fuel an unwelcome return to more adversarial contract arrangements”
Cheaper borrowing may well encourage more housebuilding, for example, but poorer terms for savers will make the huge sums required to get on the housing ladder ever harder to amass. Without public sector action, housebuilding activity is likely to be concentrated at the plush rather than affordable end of the market.
Fall in the pound makes impact
Of broader significance to all branches of industry is the tumbling value of sterling. Both the Brexit result and the Bank’s decisive rate cut have slashed the value of the pound.
The result is that UK exports of goods and services will become cheaper, as will UK property to foreign buyers. But equally, the prices of foreign-sourced components and raw materials are spiking substantially upwards, creating cost pressures for the industry at a time when its customers are looking for reduced prices in a near-zero interest rate climate.
The consequent pressure could fuel an unwelcome return to more adversarial contract arrangements, as different pieces of extended supply chains each try to rebuild their own lost margin. Existing contracts may also come under strain if their terms fail to accommodate the exchange-rate swings we’ve witnessed.
While it is understandable that Theresa May and her new Cabinet need time to take stock, the Autumn Statement cannot come soon enough.
When the chancellor stands up to speak, the one thing he must provide is clarity. That will be welcome even if it brings a dramatic shift in priorities.
Decisive leadership is infinitely preferable to being left in what could become a post-Brexit limbo.
John Hicks is director and head of government & public at Aecom