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Forecasters expect 'short-term' hit for construction after Leave vote

As the UK undergoes a radical shake-up, both politically and economically, following the vote to leave the EU, forecasters are set to revise their expectations for the industry’s near-term progress.

In times of economic and political uncertainty, it is tough being a forecaster.

And it doesn’t come any more uncertain than Britain voting to leave the European Union, the prime minister stepping down, leadership battles on both sides of the house and the pound sinking to a 30-year low, all in the space of a week. As Britain attempts to steady the ship after the Leave vote, it is faced with short-term warnings of another recession and stock market volatility, while the chancellor George Osborne has scrapped the government’s deficit target of achieving a surplus by 2020.

With the industry’s leading forecasters preparing to revise their estimates, how do they assess the short to medium-term effect of Brexit on the construction industry?

Pre-vote optimism

Most of the industry’s current forecasts date from spring 2016, when – despite uncertainty around the referendum beginning to creep in – economists remained bullish over the industry’s prospects for the next three years.

Forecasts from the Construction Products Association (CPA), Experian, Hewes & Associates and Leading Edge pointed to average industry growth of 3.4 per cent in 2015, followed by 2.8 per cent in 2016 and 3.3 per cent in both 2017 and 2018.

“The economy will see a mild recession in 2017, and a decline in housebuilding”

Martin Hewes, Hewes & Associates

There are variances between the individual forecasts – with the CPA forecasting 4.1 per cent growth for 2018, compared with 2.6 per cent rom Experian, for example – but pre-referendum forecasts still largely pointed to a level of growth that was above GDP growth rates.

But what now?

Downwards revisions

Two leading forecasters, Martin Hewes of Hewes & Associates and Mel Budd of consultants Leading Edge, say that they are likely to downgrade their forecasts following the Leave vote.

“Even though I did expect a vote to leave, my feeling has changed because of the political turmoil that’s arisen from it,” Mr Hewes says. “What it will mean over the short term, I suspect, is that the whole economy will see a mild recession in 2017, and a decline in housebuilding.”

Mr Budd agrees, particularly regarding the impact on the housebuilding market.

“Our view would be that we will dampen down the forecasts over the coming year, rather than in the longer term,” he says. “We don’t really know what’s going to happen but there are plenty more potential negatives than positives in the short term.”

Mr Hewes adds that the housing market, particularly in London, is “long overdue a correction”, while Mr Budd says that any restriction to freedom of movement, along with a lack of labour, will be the two biggest issues for housebuilders to contend with in the medium term.

The referendum also raises the issue of major projects: what happens to big-money schemes like Hinkley and High Speed 2 when a new prime minister takes power?

Mr Hewes says that Hinkley is not factored into his forecasts, and adds that he “never expected it to go ahead”, despite the commitments from EDF Energy following the referendum. Mr Budd adds that it is “hard to come to a conclusion” on whether big projects will go ahead.

When the smoke clears

CPA economics director Noble Francis warns that drawing any conclusions from the available industry data would be premature.

”There are plenty more potential negatives than potential positives in the short term”

Mel Budd, Leading Edge

“I think any of the early indicators that we would tend to use for forecasting relate to data that is from before the EU referendum, so what we will have to do is focus on coming up with some scenarios rather than the point-estimate forecasts [those that use actual data, rather than modelling] that we have done in the past,” he says.

“Until we get to a period of time post-referendum when we have data that clearly highlights the direction each of the major sectors is going, then it will have to be very much around ‘scenarios’ rather than specific forecasts.”

This week’s Markit / CIPS Construction PMI has given an early indicator of the uncertain times ahead, with activity in June falling to its lowest level of seven years.

Prof Francis adds that the impact of uncertainty was already being felt before the referendum hit and that this had “only heightened since”. Only once the uncertainty dies down can the industry truly take stock of what the real, quantifiable impact has been, he argues.

While all forecasters agree that the immediate impact might be difficult to measure, they agree that any recession is likely to be in the short term, rather than a longer, prolonged financial downturn like that which followed the 2008 financial crash.

Mild recession?

Mr Hewes says any potential downturn would not be “nearly as bad” as the industry saw in 2008.

“Whenever Britain has a recession, it tends to be bad,” he says. “I think the one on the horizon will be shallower than previous recessions.”

He also adds that Europe may end up being “much worse off” than Britain in the medium term once any Brexit scenario is resolved.

“I take the view that Europe is going to lose more out of this than the UK; my worry is that while it’ll be fiendishly difficult for Britain to pick its way through trade negotiations, what’s going to happen to Europe in the meantime?”

“I think the recession on the horizon will be shallower than previous recessions”

Martin Hewes, Hewes & Associates

One positive to Brexit, he says, could be the devaluation of the pound, which could open up more avenues for foreign investment by making the UK significantly cheaper to invest in.

Mr Budd agrees, adding that it has the potential to boost sectors outside of construction, which may then have a knock-on effect for the industry.

“It would help manufacturers and industry to export,” he says. “As a consequence we might see more of a push for construction in the industrial sector in the medium to long term.”

Quids in

However, Prof Francis adds that, due to the nature of the international supply chain, the industry cannot bank on a lower pound having a positive impact on trade costs.

“If you look at imports, they tend to be around 10 per cent of construction output, so the fall in the pound will obviously have an impact on import costs,” he says.

“There may be a positive impact on exports, but remember, if you look back to 2010, we had a fall in the exchange rate of around 25 per cent in the space of 18 months, and we didn’t see a significant improvement in exports.”

He explains that many components that go into construction materials for export are actually imported themselves, and vice-versa, meaning that the actual impact on overall costs may be minimal.

“It’s a much more complicated relationship than it was, say, 30-40 years ago when a fall in the exchange rate meant that, after around six months, you’d get a significant improvement in exports and net trade,” he adds.

So where does all this leave the industry?

The consensus is that, until a new prime minister is in place and the details of any potential Brexit scenario are made clear, it will be difficult to fully understand what the impact of the referendum might be.

A negative consequence of that uncertainty could be a spike in delayed decisions on projects, planning difficulties, and a lack of clear policy from the government.

Though sector forecasts are set to be revised downwards in the short term, the longer-term implications of Brexit will become clearer in the coming weeks and months. 

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