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What does election uncertainty really do to contractors’ workloads?

Any potential change of government or political uncertainty is likely to spook investors and make developers think twice about pressing ahead, but what does history actually tell us about the impact elections have had on construction?

The past four general elections have all had varying impacts on the construction industry.

Labour has dominated at the polls over that time, with victory in 1997 followed by two more successes in 2001 and 2005 – with the only change of government taking place in 2010 with the formation of the current coalition.

Yet aside from policies or changes in government, the impact of the actual elections on the economy and construction is frequently cited as a looming constraint by industry.

But has recent history shown this to be the case?

Output impact

A general election’s impact on output has not been uniform by any means.

In both 1997 and 2001, construction output saw an increase in Q1 and Q2, with a slight dip post-election.

Following the 1997 election, output dipped 1.3 per cent between Q2 and Q3, while in 2001 it saw a small decline of 0.3 per cent over the same period.

Contraction following the 2005 was even sharper, with output dipping 2 per cent between Q2 and Q3.

However, the 2010 election showed a marked difference; output increased from Q2 to Q3 before tailing off in the last quarter of the year.

Output Q2-Q4 percentage change election years_ONS

Source: ONS

“In the run-up to the last election, a lot of policies and building work was brought forward by the incumbent Labour government, especially public sector spending,” says Glenigan economics director Allan Wilén.

“As a result we saw a significant upturn in output during the first three-quarters of the year.”

Mr Wilén says this strategy was intended to offset the recessionary collapse in private sector work.

“There was a quite obvious political rationale behind it – it was intended as a vote winner,” he adds.

Midas chairman Steve Hindley said that the circumstances of the 2010 election had a bearing on its outcome for contractors.

“In 2010 the construction industry was very much in unchartered territory as we were in the midst of an economic crisis,” he says.

“The coalition seems to have pulled us through that.”

But the 2010 election seems to be an outlier in this case.

“In 2010, the construction industry was very much in unchartered territory”

Steve Hindley, Midas

One issue with official output statistics is that much of the work included as part of the data is from ongoing projects – many of which may well have been started without an election in mind.

“When it comes to larger long-term projects, contracts and planning go in significantly before – elections are factored in, and there’s no reason that an election would have an impact on the project,” says Construction Products Association economics director Noble Francis.

Biggest effect

New orders seem to be the area that has historically been most affected by an election, both in the run-up and the aftermath.

In the aftermath of all four elections, new orders have fallen between Q2 and Q4, with the biggest decline of 7.3 per cent recorded in 2005 and 2001 not far off at 6.8 per cent.

The fall-out from the 2010 poll was less severe but still significant, as new orders fell 3.1 per cent from Q2 to Q4.

New orders percentage change Q2-Q4 election years_ONS

Source: ONS

And in the midst of pre-election battlegrounds, they do not fare much better.

In the run-up to the 2001 vote, new orders declined more than 10 per cent between Q1 and Q2, while in 2010 the equivalent figure was 9.8 per cent.

The only pre-election increase in new orders was in 2005, when they rose 4.7 per cent – but this was followed by a 7.4 per cent dip between Q3 and Q4, suggesting the decline was simply offset.

“During the election period, there can be something of a hiatus – the civil service effectively can’t do anything,” Mr Wilén says.

“Post-election, again there can be a delay – whoever comes into power will take a fresh look at their existing spending plans and making sure they fit in with their priorities.”

New orders Q1-Q4 election years_ONS

Source: ONS

In contrast, private commercial projects have historically remained relatively stable; in some cases, they have even grown following an election.

In 2005, private commercial new orders grew 6 per cent between Q2 and Q4, while in 1997 they rose 0.3 per cent over the same period.

Starts dive

But, a change of government seems to be the biggest factor affecting project starts – with almost all sectors across the board seeing a dip following an election.

While Labour may have held onto power after 2001 and 2005, the change of government in 2010, combined with the impacts of recession, saw project starts decline in Q3 and Q4.

Between Q2 and Q4 2010, private housing starts dropped 18 per cent, social housing starts fell 25 per cent, hotel & leisure starts by 23 per cent and retail starts were down 16 per cent, according to Glenigan.

“A change in government can depress the flow of project starts in the short term”

Allan Wilén, Glenigan

A change in government, in the short term, can depress the flow of projects starting on site,” Mr Wilén says.

Approvals see public-private split

For planning approvals, however, elections have produced mixed results.

During 2010, major publicly funded sectors took a significant hit in the run-up to the election.

Social housing planning approvals declined 61 per cent between Q1 and Q2 2010, while community & amenity posted a 19 per cent fall.

But for primarily privately funded sectors, the data shows the impact of the election is relatively minimal.

These sectors are more likely to see a small decline in the immediate aftermath of a vote, following an uptick later in the year as election anxiety dissipates.

Following the 2010 poll, approvals for office projects plummeted 66 per cent in Q3, followed by a rebound of 51 per cent in Q4, according to Glenigan.

Yet while the historical context is by no means consistent, ‘election uncertainty’ might not be as real as has been generally believed.

But how might this context apply to this year’s election – and should contractors be concerned?

2015 predictions

Data suggests project starts have been relatively consistent for the first two months of this year, with housing and commercial starts recovering from a seasonal dip in December.

And forecasts from the Construction Products Association suggest there will be no major hit in output, with growth remaining consistent at 5.8 per cent in 2014 and 2015.

“[The situation] will be more stable this year in comparison to the last election,” Mr Wilén suggests.

“Given the current constraints on public spending, we’re unlikely to see the same feast and famine that we saw in the run-up to 2010.”

And several major contractors appear relatively unconcerned by potential knock-on effect of a change of government.

Speaking to Construction News in February, Galliford Try construction CEO Ken Gillespie said his company was not “unduly concerned” about the election.

“From a construction point-of-view, I think there’s reasonable consistency on commitment to capital spending,” he said.

Keltbray Group finance director John Keehan agrees that the main parties “seem to be in agreement” on the long-term importance of infrastructure planning.

But he warns that the industry needs a “neutral body” to assess infrastructure planning in order to avoid further uncertainty.

“Uncertainty is bad for business and bad for the economy, and could lead to an economic slowdown and stall construction activity once again,” he says.

“This really is the last thing we need, now that we’re back on track and about to exceed our pre-recession peak.”

Savills head of commercial research Mat Oakley also believes the impact will be “relatively limited”. However, he concedes that the closeness of the election could lead to some projects being delayed.

“At this election, we won’t see the same ‘feast and famine’ we saw in 2010”

Allan Wilén, Glenigan

“A hung parliament, a prospect of a second election or a period of horse trading trying to form a new government might make commercial developers think, ‘Do we really want to push the button on this project?’” he says.

There are instances of this happening in 2014 in the run-up to the Scottish independence referendum – TIAA Henderson only restarted its £850m St James Quarter scheme in Edinburgh after the election result.

But data from the latter half of 2014 shows Scotland bounced back significantly from its own period of vote anxiety – suggesting delays to commercial projects may only be short term.

The historical new order data suggests that an election hiatus can dampen rather than derail the industry’s growth in the short term.

Midas chairman Steve Hindley adds that whoever wins power will need to react quickly to ensure that the industry’s recovery does not falter.

“I would like to think that a new government – whoever it may be – will pick up the reins and the dialogue very quickly and continue to drive things forward,” he says.

It seems that once a new government is in place, the industry will continue to grow.

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