Slump in the construction sector shows self-employed vital in building a new economy
The construction sector is often seen as barometer for the future economic performance of the wider economy. Imported materials are subject to currency fluctuations, projects are often funded through Foreign Direct Investment, and firms are dependent on foreign labour, access to which is now uncertain since the referendum. Given its recent slump, the flexibility the 800,000 self-employed offer the construction labour market will play a key role in how the industry manages recent shocks, and whether it can return to growth.
Today’s construction figures from the ONS show in Q2 2016, output in the construction industry decreased by 0.7 per cent compared with Q1 , with output year on year decreasing by 1.4 per cent. In June 2016, construction output decreased by 0.9 per cent compared with May 2016, which includes data taken after the referendum. Although the ONS say there is "little anecdotal evidence" to suggest that the referendum has had an impact on the sector, these data corroborate previous indictors that show the industry is under pressure following the UK’s decision the leave the European Union.
It follows the purchasing managers’ index (PMI), a survey which gauges the confidence of purchasing executives in private industries, which fell for construction to 45.9 last month, down slightly from June and below 50, showing a contraction. This mirrors a contraction in both the PMIs for services and manufacturing. It is suggested Brexit is the primary factor weighing on business activity.
During this period of uncertainty, it is vital Government supports the self-employed, who allow businesses to react to fluctuations in demand and engage specialist contractors for project based work.
The weak pound will put upward pressure on the costs of imported equipment and materials, such as construction and earthmoving components and parts, of which the UK is a net importer. To add to concerns in the housing sector, Royal Institution of Chartered Surveyors (RICS) research showed UK house price growth slumped to a three-year low in July. This will make the sector a less attractive option for foreign investors, and may well contribute to a slowdown in growth.
Prime Minister Theresa May has declared she will deliver on the wishes of the British people to see controls on freedom of movement. A reduction in access to labour could hit the construction sector the hardest. Before the referendum, David Thomas, Chief Executive of Barratt Developments, said a “significant part” its labour force, particularly within the London market (estimated at 30 per cent- 40 per cent), comes from continental Europe. He called “labour availability” the “biggest concern” for the industry. Post-referendum uncertainty is also reflected by market confidence. Barratt’s share price, for example, has fallen more than 25 per cent.
A call for radical reform
With the Prime Minister signalling she does not intend to secure freedom of movement, radical reform will be needed to ensure the self-employed are supported so the construction sector has the skills it needs. Government should review the CITB levy, which is paid by construction employers and reinvested in skills training for employees, generally not the self-employed. Freeing construction employers from the levy, which puts larger players at an advantage due to the disproportionate administrative costs to smaller firms, will free up more capital, allow companies to engage more self-employed, and benefit the industry as a whole.
There are a number of other things Government can do more generally to avert a deeper downturn in the third quarter, predicted by many analysts. The Prime Minister’s pledge to introduce Treasury-backed bonds to fund infrastructure projects would be a welcome boost the sector. A quick decision on the UK’s airport capacity and confirmed support for other major infrastructure projects such as HS2 would also help provide long term clarity.
With EU negotiations expected to last a number of years, firms will be reluctant to increase capital expenditure without political commitment. At the start of this month, the National Institute of Economic and Social Research (NIESR) projected that 320,000 jobs would be lost by the third quarter of next year and warned the economy had a 50 per cent chance of slipping into recession in the next 18 months.
The state of the construction sector will be a decisive factor as to whether these predictions become reality. IPSE urges Government to address longer term construction and infrastructure commitments by the Autumn Statement at the very latest, and ensure appropriate provisions are made to support the self-employed in accessing training.
Follow Adam on Twitter @AdamIPSE.