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Buoyant UK construction faces a future of EU uncertainty

Battle lines between staying in and leaving the EU are already being drawn after the General Election. But what effect might the EU referendum have on the construction industry in the UK?

David Cameron’s pledge to hold a referendum on Britain’s membership of the EU by 2017 was one of the cornerstones of his party’s election manifesto.

Both sides of the argument - staying in or leaving the EU - have both started to make their case to the country ahead of the referendum in two years’ time.

But for the construction industry that has become highly reliant on EU workers to meet skills shortages, particularly in London, the upcoming referendum could have a serious impact on labour supply - and consequently, contractors’ ability to increase their workloads.

Total construction output percent change

Referendum results

Few business leaders have come out for or against a ‘Brexit’.

JCB’s chief executive Graeme MacDonald argued in May that an exit from the EU would “make no difference” to trade, and said there had been “scaremongering” by the ‘Yes’ side on areas like jobs and trade.

Most contractors contacted by Construction News are unwilling to go on the record to state their preferred outcome - although one senior manager at a large UK construction firm says that he “doubts” an exit would affect its business model.

Most contractors would prefer Britain to remain in the EU, according to an anonymous survey.

A poll conducted by the Civil Engineering Contractors Association during Q1 2015 showed that 68 per cent of respondents would prefer to remain in the EU, with 12 per cent preferring to leave, and the remaining 20 per cent still undecided.

EU membership question

Source: CECA

The majority of UK contractors’s output would not be directly affected by an exit from the EU, argues PwC construction and engineering partner Chris Temple.

“The actual impact on UK contractors’ own output is pretty low – it doesn’t change where most of them can operate. The number of UK contractors that also operate in the EU is pretty small,” he says.

“Would an EU exit influence demand and supply for construction in the UK? If anything, you might argue that there would be fewer overseas firms operating in the UK, meaning that it might even help contractors on the supply side.”

Forecasts from EuroConstruct have already suggested that the UK’s construction industry will be one of the most consistently strong performers across the EU up to 2017, with output expected to grow by around £17.7bn between 2014 and 2017.

Though contractors’ workloads may be unaffected by a Brexit, what impact might it have on the flow of labour and skills?

Skills questions

As the industry battles with an increasing skills shortage, contractors – particularly those in London – continue to seek workers from Europe to meet their skills demands.

Migration from the EU8 (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic and Slovenia) has increased significantly since 2013, and between March 2014 and March 2015 alone, it has grown by 17 per cent.

The number of workers in the UK born in these countries has increased by 37 per cent since January 2013.

Over the same period, the number of workers in the UK born in Romania and Bulgaria has grown by 64 per cent. In total, the number of workers from the EU8, Romania and Bulgaria now working in the UK, has hit more than 1.1m as of March 2015.

These figures are for the total workforce, rather than for construction, but anecdotal evidence from contractors suggests that London-based contractors are particularly and increasingly reliant on EU-based labour.

Mr Temple says that any vote to leave the EU could have a major impact on contractors’ abilities to fulfil their demand for skills.

“We’re obviously pretty reliant on EU labour at the moment, and I think if the referendum did take us out of the EU, the impact on labour supply would have a big effect on the industry,” he says.

But Royal Institution of Chartered Surveyors (RICS) chief economist Simon Rubinsohn disagrees, arguing that any exit from the EU might not necessarily mean that the skills crisis will get worse.

UK employment by country of birth

Source: ONS

“One thing to bear in mind, rather than saying that a ‘Brexit’ would be a barrier to attracting skilled labour from overseas, is that we don’t know what arrangements might be put in place after a decision to withdraw,” he says.

“There’s a lot of talk of a points-based system, and in that environment, there’s no reason to believe that skilled workers in construction would be affected given the shortfall we have.”

Positive outlook

The UK’s outlook appears strong – with the pound consistently performing ahead of the Euro – concerns over a potential ‘Brexit’ are not yet spooking investment.

“Investors are looking for strong growth and high returns, and on the basis that the UK would still have that growth, I think they would be inclined to continue investing,” Mr Temple says.

Election uncertainty is a phrase that has been trotted out frequently in the run up to both this year’s general election and last year’s Scottish independence referendum – and in both cases, the effect on investment and output was minimal.

A small dip in output and investment may be expected in the run up to 2017’s EU referendum, what happens after that is still unclear, with no indication of what ‘renegotiation’ David Cameron might achieve.

Short-term prospects are good, but long-term uncertainty remains, Mr Rubinsohn says.

“It doesn’t take much to undermine confidence in the industry – any changes can have significant ramifications for construction.”

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