What Brexit uncertainty means for us

Words:
Brian Green

Brexit chaos aside, how does it look for construction? The underlying trend is gently positive, but that could change all too quickly

Chart 1
Chart 1

Forced to wear VR headsets that constantly replay possible Brexit outcomes. That’s how it must feel to thousands of UK professionals and business people currently confounded by a world filled with conflicting Brexit-related possibilities – most of which appear unattractive.

Pull off that headset and suddenly the real world doesn’t look so weird or uncertain. People seem to be getting on with things pretty much as normal. That’s what they do.

That not to say Brexit doesn’t matter. It does. And while people will inevitably act in anticipation of impending opportunity or disaster, the full impact will not be measurable until long after something real does change. And, frankly, no one knows what that change will be.

So, taking off the VR headsets as a New Year’s resolution, what does the real world look like for those busily trying to improve the UK’s built environment and make sense of its trajectory?

Don’t panic yet

At first glance it’s business as normal, at least as you can make it when bombarded by uncertainties. But certainly, there’s no sign of heading to hell in a handcart in the data.

Economic activity, as we see in Chart 1, is unspectacular and well below the long-term average of around 2.5%, but it remains positive and there are no expectations of an imminent collapse. The December issue of HM Treasury’s collation of independent economic forecasts suggests expectations are for 1.3% growth this year and about 1.5% next year.

From a construction point of view that’s probably sufficiently low growth to cause a bit of unease. History suggests that long spells of low growth lead to pallid increases in construction activity and can prompt a fall in workloads.

Chart 2
Chart 2

But, when we turn to the construction figures (Chart 2), there seems to be no immediate sign of trouble ahead. That said, to read the data you need to look through the clouding effects of bad weather during the early months of last year and the impact of the Carillion collapse. Both halted ongoing work and a subsequent period of catch up, as is clear in the chart.

The question is how much of the later period of growth is still the result of this effect. Pessimistically, this might be masking underlying weakness in activity. Optimistically it’s passed through and we are enjoying solid rises in activity.

Don’t get too excited either

But before getting too optimistic, it’s worth considering the new orders figures.

The latest figures we have are for the third quarter of last year. They show that orders for new work won over the previous year are down in cash terms by 11% compared with the average over the previous two. How much of a backlog of work still exists is never easy to predict, but these figures do hint at a weakening market. Whether this is down to clients sitting on their hands waiting until the fog of Brexit clears is again hard to know. It may be there is a surge in orders signed once the withdrawal agreement is settled. Then again maybe not. It’s a worry.

Chart 3
Chart 3

But there are no signs of impending doom in the market sentiment surveys. They may not be upbeat, but mostly the suggest an industry ticking along in broadly positive territory. The picture we can take from Markit and the Bank of England Agents (Chart 3) is one of ‘modest growth’, according to the Bank’s agents. They did however note an easing from the strong growth enjoyed by house builders and weakening in work related to offices and retail.

Given RICS’ strong connections with the commercial sector you might expect it to give a relatively downbeat assessment of the sectors fortunes. But feedback from its members in its autumn construction and infrastructure survey was that workloads continue to rise across all sectors and geographic regions. Though they said profit margins are being squeezed.

Of those who responded, a 20% majority saw increases in work over the previous quarter, which was up but remained in the recent range of scores seen in recent quarters. Expectations (which historically tend to be above what reality proves later) dropped to a level not seen for more than five years, except for the quarter following the EU referendum result. But even then a majority of a third expect to expand workloads in the year ahead.

Local builders too seem relatively upbeat too. The FMB State of Trade survey for the autumn found a solid 16% majority of those who responded increasing workloads over those seeing falls. The majority of those expecting their workloads to increase in the coming months was 26%. The mood could well be described as moderately optimistic.

Wider optimism

The RIBA Future Trends survey is also positive, both in terms of workloads achieved and future workloads expected (Chart 4). It is mildly positive, admittedly, compared to before the referendum, but nonetheless positive. Perhaps unsurprisingly London-based practices are the nerviest about prospects, but in October they were still on balance positive.

  • Chart 4
    Chart 4
  • Chart 5
    Chart 5
12

And there’s good reason to be positive. As we see from Chart 5, which takes data from the Annual Business Survey, recent years have been good for architectural practices. Sadly, it will be some time until we see the results for 2018, but the upward trend in the numbers in recent years and the surge in gross value added through architectural activities in 2017 is very encouraging.

The GVA figures from this survey are more indicative than precise, and to help account for inflation they and the turnover figures have been adjusted using GDP deflators. Even so, the picture is clear that architectural activity in terms of annual gross value added has pretty much doubled since 2010 – from under £3 billion to solidly over £6 billion in 2017.

Some of this growth has been due to the rapid expansion in exports of services, which has been a success story for the architectural sector and indeed many of the professions working in the built environment.

The Brexit effect

How Brexit might alter this upward trend is tough to judge. One thing that is well accepted, the ability to attract talent into the UK from abroad, was a boon and supported that export effort. So it’s no shock that there are concerns over the free flow of EU talent being checked – although there will be some relief at the Home Office announcement that Tier 1 (Exceptional Talent and Exceptional Promise) visas will be available to applicants from architecture.

The importance of being able to export and to expand exports shouldn’t be underplayed. The construction sector is highly volatile as too many architects will have learned to their cost when recession has bitten.

The signs may suggest a modicum of stability in the market. But with or without the VR headsets on, Brexit hasn’t happened yet and the outcome of leaving the EU remains extremely uncertain. Let’s also not forget, while our vision is glued to Brexit, that it’s possible we may also be running out of steam in the current business cycle. Either way, there’s no cast-iron guarantee growth will continue for that much longer.

Having a market or markets outside your home country helps to smooth the very bumpy ups and downs we have learned to expect from the construction sector.

And let’s not forget, having the opportunity to work on projects across the globe makes the whole thing that much more exciting and much more attractive to the exceptional talent everyone craves.

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