The forecast for Britain’s GDP growth in 2019 averages around 1.5 per cent according to the Treasury’s survey.
How smoothly Brexit goes is likely to have a large bearing on whether the economy hits or misses this figure, but other factors are lining up to have a significant impact on the construction industry.
Brexit boost or bust
How Brexit will actually play out at the end of March is still unknown, but since Theresa May faced down a no-confidence voted that was led by Brexit hardliners, and parliament voted in favour of having a final say on the deal, a no deal outcome appears less likely.
If a soft Brexit is achieved, that could help settle some of the uncertainty that has reigned over the UK economy since June 2016 and lead to paused projects coming through.
Britain’s exit from the EU is just three short months away, but a lot could still happen in that time to destabilise things further.
The withdrawal agreement could be voted down, the prime minister could be ousted and even the government could change.
Regardless of whether any of these events would lead to a better long-term outcome, it would increase uncertainty in the short term.
And as we have repeatedly heard over the past two years, uncertainty is the reason for clients putting the brakes on new projects.
Commercial down, infrastructure up
However, there are other forces weighing on commercial construction, which is the second-largest sector after housing, aside from Brexit fears.
The rise of online shopping is hurting traders on the high street and dampening demand for new retail space.
But last month also saw the weakest growth in consumer spending for a decade, which has the retail industry worried that shoppers won’t splurge out this Christmas, putting any expansion plans in jeopardy.
“In the absence of a sudden strong pick-up in growth it seems unlikely lending sentiment to the sector will change”
Demand for new office space is also down and the Construction Products Association is forecasting a double-digit fall in output in this market for 2019.
Infrastructure demand gives cause for optimism in 2019 however. Network Rail’s CP6 spending period is due to start and Highways England has a big pipeline of work. Activity at Hinkley Point C should ramp up too.
And of course, 2019 is when the long-awaited civils work on HS2 is scheduled to start.
But costs have already risen and HS2 is now negotiating with contractors to try and get the project’s budget back under control while the project remains shy one chairman. Whether things start in June as is currently planned remains to be seen.
Interest rates and lending
Interest rates are expected to creep up in 2019, with the Treasury’s survey of independent economists forecasting it to it 1.25 per cent next year.
This is far from an eye-watering increase, but it would be the highest level for more than a decade.
Outside of the top 10 largest contractors most construction companies do not depend on large amounts of bank lending, so an interest increase should not be too painful in terms of pushing up finance expenses.
Where it could have a bigger impact is in the commercial construction market, with clients finding that higher borrowing costs making some projects unviable.
For those contractors that do depend on bank lending, the rise in interest rates could be a moot point as we hear UK banks are cutting their exposure to the sector altogether.
The impact of this became clear this month when Kier was forced to announce a planned £264m rights issue in response.
In the absence of a sudden strong pickup in growth it seems unlikely lending sentiment to the sector will change.
Firms with credit facilities and bank debts maturing in 2019 and 2020 might find they have to look further afield for financing and dip into the more expensive private placement market.