Marmite might be made in the UK, but its price is affected by global issues. The same goes for construction materials
Marmite. A perfect pot of metaphors. It is ‘love it or hate it’. It is Britishness. It links neatly to toast, even to breakfast, which sounds a bit like – wait for it – Brexit. Is there another product better suited to symbolise a row prompted by the UK decision to leave the EU?
Conspiracy theorists may argue that Unilever’s public arm-wrestling with Tesco over the price of the spread was just a PR stunt. Marmite is made in Britain – in the brewing capital Burton-on-Trent. It couldn’t be more British. So why hike the price?
Sadly, global trade and global corporate ownership doesn’t work in such a simple way and price negotiations are not just based on what happened a couple of months ago or what is happening now, but on a longer-term view of the future and the past and expectations.
For all the fuss, bluster and amusement it has caused, the background to #marmitegate provides important messages for designers and constructors of the built environment – on currency fluctuations, overseas ownership and foreign trade and the limits of substitution.
The impact on sterling of voting to leave the EU was pretty immediate. Markets aren’t perfect and there may be a case to suggest sterling was overvalued before the vote. But Chart 1 shows the referendum result hit the global value of the pound heavily. More recent talk of ‘Hard Brexit’, as the government’s approach started to become clearer around the time of the Conservative Party conference in early October, further weakened its international strength. The total fall is about 15%.
As with all economic shifts the falling value of the pound means some win and some lose. We might expect to see exporters smiling and importers chewing their nails to the quick. But, equally, the falling pound will generate effects that may be unexpected or hard to predict, particularly if the current lower level becomes a more permanent feature, forcing the fabric of the economy to adjust.
One obvious impact on construction will be materials cost increases. To date most concern over Brexit from within the construction fraternity has centred on immigration and the possible effects of controls on labour supply. Less attention has been paid to products and materials.
Vernacular design may say much about the tendency and desire to source locally. Building materials tend to be heavy relative to their price and expensive to shift about. But UK construction has long relied on large volumes of imports, timber being a prime example. In 2015 the value of imports of wood and wood products for construction was estimated at around £2 billion.
In total the industry is estimated to import £14bn, which amounts to about 10% of construction output. Chart 2 is constructed from data provided by the government business department BEIS (Business, Energy & Industrial Strategy). The data are quite crude and some adjustments were necessary. For ease of reading the prices have been adjusted to approximate constant prices using the Treasury GDP price deflator.
It is striking how closely the imports track construction output at an approximate 1:10 ratio and how steady this relationship has held for more than 35 years.
Interestingly, the chart also shows the stagnation of exports of UK-produced building materials, despite a massive expansion in construction globally. The international trade performance of the sector is a big and complex issue on its own and the falling rate of sterling may boost exports of UK building materials. But the relatively poor export performance, at first sight at least, hints that there’s not a ready mass of UK-based producers poised to gear up and compete with substitute products to the now more expensive (in sterling) imported offerings.
The broadly accepted rule of thumb is that the total value of building materials used in the UK is about 40% of construction output. So we can roughly reckon imports account for about a quarter of all building materials used.
So a 10% or greater rise in imported materials prompted by a weaker exchange rate would have a significant effect on construction costs. How much and where the price pressure might hit hardest is extremely difficult to model. The variables are great and uncertainty huge. How much room there is for substitution with UK-produced products? What shelter might financial devices such as hedging provide and for how long? What price demands might be made by overseas-based materials companies looking to support their profits – measured in US dollars or euros, not sterling?
Furthermore, price pressures will not be limited to imports or products produced by foreign-owned firms. Much of the raw materials and many of the components used by UK manufacturers will be imported. Energy tends to be priced globally and is a major cost to locally based building materials producers. A falling pound will push up input prices and have a knock-on impact on locally sourced building materials.
Looking at the impact on construction activity, a central issue facing all in the sector is increased uncertainty since the vote to leave the EU. Here we see just another facet, uncertainty over costs, enlarged because of the scale of the fall in the value of sterling and the continuation of its decline.
Uncertainty is not a friend to investors in the built environment. Currently it really is a pest, because it comes at a time when the various measures of the industry’s activity are very confusing – increasingly erratic and contradictory. The only constant is that the signals of growth appear rather frail.
Indeed the latest official output figure for August suggests a fall in activity (Chart 3). In reality the chances are this figure will be revised, possibly up. The current series is relatively new and the seasonal adjustment process is yet to settle, so the recorded fall may be more down to the statistical treatment than a drop in activity in the real world. There are also problems, it would seem, in the way the infrastructure sector is accounted for.
It doesn’t make the data useless, but it does make it hard to read. If you put to one side infrastructure work, the picture is of a sector still growing slowly, occasionally flat-lining, as it has been for the past 18 months or so. Lacklustre is a term one might use.
Looking to other data, the latest state of trade survey from the Construction Products Association certainly doesn’t suggest the construction sector is shrinking. After a wobble in the second quarter, the balance of firms is weighted to those seeing sales expanding in the third quarter compared with the same period a year ago, as Chart 4 shows.
The measures we see from the Bank of England and Markit in Chart 5 point to slowing growth, but growth nonetheless. The Markit/CIPS survey has clearly been volatile and driven by shifting sentiment, but in September it pointed again to modest growth. The Bank of England Agents’ measure, meanwhile, in August dropped yet again, suggesting heat in the sector is gradually dissipating, but there is still expansion.
The Experian Leading Indicator, as we see in Chart 6, paints a very similar picture to the Bank of England and Markit/CIPS surveys: construction is growing, but slowly and slower than it was.
The RIBA Future Trends Survey (Chart 7) points in a similar direction, with expectations lower than before, but broadly positive after the wobble in the wake of the EU referendum.
The chances are that there will be more erratic and contradictory signals in the measures of construction activity over coming months. This would not be unusual. It is quite common to find the data hard to interpret when the industry is, for instance, at a turning point.
The trouble is, if we are at a turning point, we don’t really know which way the industry is turning, when or how. The wheel’s still spinning. Love it or hate it, the times they are a changin’. And it is not clear what that change will mean for those engaged in delivering a better built environment.