Can we blame #Brexit?

A bit of digging reveals than Brexit fears aren’t the only factor that could be affecting construction output

Chart 1
Chart 1

It’s hard to consider anything economic in the UK at the moment without reference to #Brexit. For many it’s tedious, yet the possible effects of the EU referendum are an important consideration when judging how well construction activity is doing.

For analysts there’s a question of how much the uncertainty ahead of the referendum vote is behind the recent lacklustre data on construction activity and if we might see a bounce-back after June 23.

Whatever your view of opinion polls, they show that the chances of a vote to stay in the EU, or to leave it, are pretty even. Chart 1, showing YouGov polls, illustrates how finely balanced it is. Averaging about 100 different opinion polls from various pollsters over the past six months hints at a narrow majority for staying in – a majority that has narrowed over the past month.

Chart 2
Chart 2

The outcome is very uncertain and has been for some while. But is the uncertainty influencing construction clients?

Various measures show construction growth has weakened. The latest construction output figures may have suggested a slight bounce in April, but this followed a low point in March and the least work done in a quarter since the autumn of 2013 (chart 2). New orders for building work were unimpressive too, down in the first quarter (chart 3). The Markit/CIPS indicator in May was also at the lowest level seen since June 2013 (chart 4).

The Federation of Master Builders tracks firms undertaking smaller works – a significant market for smaller architectural practices – and its survey suggests growth has weakened substantially over the past two quarters (chart 5, blue line), although expectations are high (orange line). And it is not hard to find other data showing poor growth at present.

With this weight of evidence it certainly looks like growth rates in construction, on most measures through the whole pipeline, has been slowing of late. How much can we lay at the door of the EU referendum?

Uncertainty is no friend to investors and a far worse companion for investors in construction projects. There will be certainty of one sort at the end of this month – the question of whether we are staying in or heading out of the EU will be answered.

We know that leaving the EU would have an impact on the UK economy. Most economists argue it would be negative. How much of an impact, where and what in the economy it will affect and to what degree it will be favourable or unfavourable is the stuff of speculation. There will be winners and losers, as in all change.

  • Chart 3
    Chart 3
  • Chart 4
    Chart 4
  • Chart 5
    Chart 5

Given this, it seems reasonable to assume that clients might have been tempted to hold off final decisions to see what the poll brings, increasingly as the vote gets closer. This would have led drop in letting projects and a dip in clients appointing designers and consultants. Talk to architects and consultants and there does seem to be anecdotal evidence of this happening. It’s not unusual to see signs of sagging activity ahead of any major vote.

But, looking at the data, it’s difficult to discern any firm evidence of this. And, with many other factors at play, it’s hard to construct a meaningful counterfactual.

You’d not really expect projects on site to slow their progress. So, a rise in fears over Brexit or general concerns over the EU referendum uncertainty would not show up dramatically in construction output statistics. It’s also not clear when the effect would have kicked in. Any measurable effects would show up in the data down the line, given that work let to contractors is often carried out over long periods of time. Also, the weakest part of construction output has been the repair and maintenance sector – not the first place we’d expect to see the effects of Brexit fears showing in the figures.

You’re more likely to expect to see this in the level of orders for new work, but these figures don’t shout of a Brexit effect. Indeed the most notable fall in new orders is within the public sector, which has been in decline as a result of a squeeze on public spending. Private commercial, where you might expect to see the most obvious impact, grew pretty well in the first three months of this year and the value of contracts let for office projects has been strong over the past six months.

Looking at the chart showing the Markit/CIPS and Bank of England Agents’ assessment of the construction sector, we see that growth has been slowing for about two years. This doesn’t mean the EU referendum isn’t having an effect, but it could be masked by a general easing in growth rates.

  • Chart 6
    Chart 6
  • Chart 7
    Chart 7

David Cameron announced his plans for a referendum in January 2013. But it was not until after the general election in May 2015 that the Conservatives, against expectations, won a working majority, the pledge became government policy and the threat of the UK leaving the EU became a real possibility.

In this light Experian’s leading indicator (chart 6) and the RIBA’s workload expectations (chart 7) might, for some, paint a more intriguing picture. Both dropped dramatically after the May 2015 election. Could this be a result of the Brexit threat? Certainly, with respect to indicators of prospective work, you’d expect to see the effect most instantly among consultants and architects whose work is far more immediately affected by changes in sentiment among clients.

Here again though, it would be tough to argue the fall last year was down to an upcoming EU referendum. One could as easily ascribe this drop to fears over the further years of austerity promised by the Chancellor. That ignores the likelihood that the cause was down less to government policy and more to other economic factors. The oil price crash in mid-2014 and the hit to investment in property by the sovereign wealth funds of oil-rich nations provides a far more plausible explanation.

It would be extraordinary if the EU referendum had not had some impact on investors in the built environment, directly on their investment choices, or through the effects of uncertainty elsewhere in the economy. It will have been a factor in the mix, discussed in numerous boardrooms.

But it would be hard to blame Brexit fears for construction’s recent subdued performance with any real conviction. There isn’t any obvious effect discernible in the data. At least not without some extremely detailed analysis.

So will we ever know the real impact of the EU referendum on the construction industry and whether it was a factor in the recent slowdown of growth in activity?

Well, there might be a post-referendum bonus, which could give us a clue to the scale of the Brexit effect.

If the vote has held back investment and put a pause on projects, we might expect a bounce after the result is known. The release of new work would be far swifter and easier to detect than any drawn-out constraint on decision making resulting from the varying levels of uncertainty that have lingered for more than three years.

That, however, only follows if we decide to stay in and, in theory, things go back to where they were before the Brexit uncertainty kicked in.

If we choose to leave, that opens up another raft of uncertainty as the UK renegotiates its place in the global economy.