Forget about Remain - that particular ship has sailed. Here are five more Rs that deserve your attention in this post-vote UK
Construction is still reeling from the EU referendum result and will be for some time. But rather than panic, it needs to take a calm look at how the land lies. Here’s a five-point guide:
I recommend meditation. Assume the lotus position (no giggling please), shut your eyes, and breathe in slowly. Hold your breath for the time it took you to mark and fold your ballot paper. Breathe out slowly. Repeat 10 times. When you open your eyes Brexit will not, alas, have vanished from the top of your worry list, but you will be in a better state to think clearly what to do about it.
Contrary to popular myth, Brexit hasn’t happened. A vote in support of it is not the same thing as it actually being implemented, and while there have been some immediate repercussions (I particularly liked the Twitter clip of a lemming jumping off a cliff, with the caption “The pound in action”), the consequences of actual Brexit are a very long way off. Indeed it may never happen if a future government can strike a deal with the EU and put that back to the electorate. So individuals and businesses in the construction sector would be well advised not to rush into any premature reaction but think through slowly and clearly how to position for various future scenarios, and the uncertainty in the meantime.
Our construction industry capacity problem has just evaporated. With indecent haste following the vote, HSBC revised its view on next year’s economic growth from 2.1% to 0.7%, and lower growth will inevitably impact construction, which is particularly exposed to general economic malaise. Indeed construction demand historically over-reacts to negative sentiment, so the impact will be worse than for the economy as a whole.
Worst hit will be housing and commercial demand. Housebuilder stocks took an early pounding as investors called a sudden end to the development boom. And a downturn in commercial demand seems inevitable as businesses hold off making investment decisions in such an uncertain market.
The Brexit vote doesn’t of itself change the business fundamentals of our largely domestic construction industry. It was inefficient on 23 June, and still inefficient on 24 June
Government-led infrastructure demand will be impacted too, though I would argue not as strongly as many commentators have suggested. Existing programmes, especially in highways and rail, are likely to continue as business as usual. Regulated utility programmes are also likely to continue to plan.
The major risk on infrastructure is where significant political or Treasury decisions are required. So much of Whitehall’s brainpower will now be diverted to Brexit that decisions will take longer to get through, and in some cases the shifts in political power makes a green light unlikely in the near term, in particular around the Heathrow/Gatwick decision (recently postponed until “at least October”), and Hinkley.
Much of the shock and awe of the Brexit vote was the reaction of the financial markets, which were largely taken by surprise. But the panic collapse of the pound and UK stocks partially corrected within a matter of hours. The real issue for businesses is the extent to which the vote, and the ongoing political uncertainties that follow in its wake, will impact the cost of capital. Prior to the vote, the Bank of England was talking about raising interest rates in the event of Brexit. Now it seems more likely they may reduce. And so far it appears access to capital, always a challenge for SMEs in the sector, will not be affected. But the financial outlook for the UK is now less stable than before, and instability will eventually drive increased cost, so reducing debt exposure would be wise where possible.
The Brexit vote doesn’t of itself change the business fundamentals of our largely domestic construction industry. It was inefficient on 23 June, and still inefficient on 24 June. It was, and still is, faced with big technological opportunities, a need to upskill and diversify the workforce, and likely consolidation. If anything, the fall in demand will accelerate the pressure for, and benefit from, change. So industry leaders should refocus attention back onto what they can do to differentiate themselves in a shrinking market. There is a critical role for clients here, to embrace partnerships with the supply chain and buy on the basis of quality. If clients buy as usual on lowest margin, it will cripple the already limited ability of industry to invest and provoke the race to the bottom that has been a hallmark of industry response to previous falling demand.
Finally I would lodge a plea for all those EU nationals from other countries who are working in the construction sector in the UK. The vote is unsettling for them personally and we all owe them our support and reassurance that there is no immediate effect for them. Our industry, like the rest of the country, thrives on the skills, innovation and energy of those who choose to come and work here, and I challenge us all to speak up for them and show that we care.
Richard Threlfall is head of infrastructure, building and construction at KPMG