Since the EU referendum the economic outlook for the UK in general and for construction specifically has been uncertain. The recent Glenigan Breakfast Briefing, held in London on Tuesday 22nd November, provided the outlook for construction markets going into 2017. Here is my take on the event.
Heightened uncertainty & sterling depreciation shocks the economy
The morning seminar started with Dan Hanson, the UK Economist for Bloomberg Intelligence. He had 2 key points, in the form of 2 ‘shocks’ to the economy. The first being heightened uncertainty and second sterling depreciation. Going on to say uncertainty for the UK economy was above average for quarter 3 2016, with a long persistent shock, mainly for UK GDP.
This has affected overall business investment, as it is very sensitive to the economic uncertainty. This is reflected in the majority of Purchasing Manager Indices pointing to a slower quarter 4 for 2016. However consumer confidence has hardly slowed since the referendum, this is mainly attributed to real wages remaining at pre-referendum levels and house price growth slowing but not becoming negative.
Since Brexit, the value of sterling has fallen greatly, which in the long-term, will cause inflationary pressure. When it does effect the UK economy inflation will be high. Dan stated that businesses cannot count on a boost to exports to improve their situation. Additionally imports may slow, as domestic demand slows due to the depreciation of sterling.
Dan concluded that the UK can expect lower GDP growth for the future, with higher inflation. Yet the UK economy could avoid a recession due the significant easing of monetary policy and fiscal policy focussing on deficit reduction.UK economy to expect lower #GDPgrowth & higher #inflation in 2017 Click To Tweet
A changing political landscape after Brexit
Arran Russell of Dehaviland, spoke on the political landscape around Brexit. Arran focused on what will be negotiated in the UK’s withdrawal from the EU. He explained the role of the main UK players in Government, and their role in Brexit, asking the question will the ‘remainers’ try to slow Brexit down?
What model could the UK adopt after Brexit and what would be the best fit? Showing examples of deals other countries had with the EU. He then asked what does the UK wants from Brexit? And is it just trade deals beyond the EU or more than that?Will the ‘remainers’ in @GOVUK try to slow #Brexit down? Click To Tweet
Economic impact on Construction
Allan Willen, Economics director for Glenigan provided a summary of the UK economy. The private sector has lead growth for the economy as a whole in 2016, with a recession being avoidable as the UK economy is looking for 2% growth going into 2017. Going on to say weaker economic growth is expected for UK construction markets.
He explained the economic impact for UK Construction in terms of project starts. Here is a summary of construction markets sector by sector:
Housing – Social housing showed the greatest growth for 2016 in the housing market. Considering the overall uncertainty within the housing market, this sector is expected to grow but more slowly in the next forecast period.
Education – This sector has shown a rise in pupil numbers for 2016, leading to a positive area of growth in the long term.
Health – This sector has performed better than anticipated in 2016, and shows strong recovery for project starts.
Retail – The rise of internet sales and retailers changing their product mix to suit has led to project growth in refurbishment, and is showing an opportunity going forwards.
Hotel & Leisure – This sector is showing a positive picture for 2017 & beyond. It is one of the only areas to directly benefit from Brexit, as the UK is now cheaper to visit with the depreciation of Stirling. An increase in foreign visitor numbers is reflected in a boost of the supply of facilities and refurbishment for this sector.
Offices – This sector has shown a lack of supply, especially in the London area, which has led to a decline for projects starts in 2016 and a further expected weakening going into 2017.
Industrial – This area has shown a fall in project starts for 2016 yet is expected to recover in 2017. Manufacturing is an area of weakness due to the uncertainty of investment after Brexit, and ‘single market fears’.
Allan summarises the prospects for UK construction in the key points:
- The private sector is driving recovery for construction, but more so for the wider economy
- Slower overall growth is expected for all construction
- Economic uncertainty persists, leading to a reduction in business investment
- A weaker housing market is expected to have the greatest impact on UK construction growth
Slowing #housing market expected to have greatest impact on #Construction growth in 2017 Click To Tweet
The key points that I have taken away from this event are:
- Lower GDP Growth and Higher inflation can be expected for the UK economy going into 2017
- An economic recession may be avoided depending upon how high inflation rises
- The private sector is driving growth and recovery for construction and the wider economy
- Uncertainty is still the key issue across all construction sectors
- Consumer confidence has remained high, but overall business confidence has reduced
- The housing market has remained strong but is expected to become weaker, having the biggest effect on construction growth for 2017