For the first time in 13 months, UK construction has seen a significant fall in activity. But whilst many experts fear a recession within the industry, and political uncertainty weighing down on the wider economy; it’s up to construction leaders to change the story.

 

October opened with bad news for the UK’s construction industry with fresh data revealing that September’s activity decreased sharply. Whilst projects are stalling across the market; likewise, new business saw a drop for the third successive month. Highlighting the extent of this decline, the Purchasing Managers’ Index (PMI) registered an activity score of 48.1, down from August’s 51.1 and the 51.9 recorded in July. For the uninitiated, a score below 50 indicates a backwards movement within the industry.

Despite only making up 6% of the UK’s economy, the news has come as a shock to the industry and beyond – but why has it happened now?

 

What Caused the Decline?

Despite a blip in summer 2016, following the EU referendum, the UK construction industry has enjoyed an unbroken success streak since 2013, with activity growing year-on-year. But despite weathering the storm of the referendum and its fallout, it’s become clear that current political uncertainty is having an unavoidable and profound effect on the industry.

According to Samuel Tombs at Pantheon Macroeconomics – discussing the result with The Independent – the government’s shift to a ‘more accommodating stance in Brexit talks’ has had a worrying effect on confidence with builders growing unsure that clients will sanction delayed projects in the near future. What’s more, as individuals and firms within the industry don’t know themselves how Brexit talks will play out; there’s a further reluctance to lay out future plans internally. 

As we’ve previously discussed at our construction industry roundtables, Westminster already holds sway over construction projects due to priorities shifting every election, and this has been exacerbated by Brexit, with no end yet in sight for the talks before the transition period begins.

Aside from Brexit, those surveyed for Markit’s PMI identified other notable reasons for the stalling, such as a subdued appetite for risk and restrictive economic conditions. In short, demand has dropped, but prices have increased.

So, the questions becomes what, if anything; can construction leaders do to reverse this decline and prevent an industry-wide recession?

 

Not All Gloom

Reacting to the news from a financial standpoint, Mike Chappell – the Managing Director of Lloyds Bank – has attempted to placate firms by pointing out that the recent data isn’t ‘all gloomy’.  Although a seemingly blasé reaction to a time of real concern for construction firms, he undoubtedly has a point.

The construction industry has weathered powerful shocks to the system in the past, and has shown massive strides in reacting to issues such as diversity and the growing skills gap. But aside from the industry’s own rugged endurance, there are other factors playing in its favour.

For one thing, countering the aforementioned cyclical nature of government was this year’s snap election. Although not everybody agreed on the outcome, its effect on construction was a positive one. By extending the current government’s time in office, the industry has been afforded a rare opportunity to blossom under the same priorities and with the same support for a longer period of time. Rather than a shock to strategies and projects with a traditional four-year term or a different snap outcome, construction firms have been able to continue focusing on long-term projects under the same mandate.

What’s more, with the likes of the Northern Powerhouse and Midlands Engine opening up whole regions to the rest of the world, there are prime opportunities available for overseas investors to become involved with UK construction, as well as the prospect of projects that can accommodate an ever-growing need for commercial office space and housing.

Not to mistake optimism with fantasy, however, these factors only work if the industry uses them to their advantage, and embraces the opportunities at hand – without relying too heavily on government support at this stage.

 

Turning the Tide

Although September’s scoring is negative and indicates a decline in an industry which, despite its relatively small contribution to the economy, serves as a pillar of the country, there’s every chance that the industry can rally together to turn the tide.

With negotiations continuing to unfold around Brexit, however, there’s little reason to lean too heavily on the government, with schemes like the Northern Powerhouse and Manchester’s own Mayfield District revival providing opportunities for long-term projects to flourish, even in the most challenging of political climates.

As Brexit negotiations continue to unfold and we enter a more stable transition period, we can expect to see some future turbulence within the industry. But knowing what we know about the construction industry’s illustrious past and penchant for adapting to situations, there’s a knowing confidence around a recovery – if the industry rises to the challenge.

 

Kaleida provides bespoke software development services to a number of construction firms, and has been proactive in engaging with the industry, its community, and the concerns around its progress. To find out more about our work with construction firms, feel free to explore our case studies. Alternatively, get in touch with us directly – our team are happy to help.