Higher import prices to add to cost inflation woes
The collapse in the value of the pound following Kwasi Kwarteng’s mini budget on Friday is likely to create yet another inflationary pressure on construction costs.
The pound plummeted to all-time lows against the dollar ($1.03) on Monday morning as the sustainability of the chancellor’s high-borrowing growth plan spooked the markets.
Though exchange rates stabilised somewhat on Tuesday, UK construction firms can expect to get less for their money when importing products and raw materials from abroad.
The fallout of Friday’s fiscal statement only adds to the heavy burden of inflation in an industry that had already experienced 24% cost inflation in the year to July.
“You’re likely to see that there’s a hit to margins in all parts of the construction supply chain,” said Noble Francis, economics director at the Construction Products Association.
Francis said that while 76% of construction products used in the UK were made domestically, much of the raw materials still have to be imported.
Allan Wilen, economics director at Glenigan, said there was a danger of UK business “importing inflation”.
“That’s why we’re seeing a lot of talk of the Bank increasing interest rates more than they would have done otherwise,” he added.
Hugh Pill, chief economist at the Bank of England, told the CEPR Barclays Monetary Policy Forum yesterday that the Bank was likely to deliver “a significant policy response” to the budget but said it should wait until its next scheduled meeting in the first week of November.
There had been speculation that the Bank might call an emergency meeting as soon as this week – having increased rates by half a point to 2.25% only last week.
Some market-watchers have forecast that interest rates could reach 5.5% by next spring.
Wilen said: “Obviously higher interest rates would have a knock-on effect on construction, both in terms of the financing for firms, but also potentially on the wider overall activity in the in the construction market. Clients will be appraising the financial viability of projects.”
Wilen suggested that while the currency fluctuations were bad news for contractors, some manufacturers could benefit.
“From a manufacturer’s perspective, though, the cost of imported materials may be rising but actually they’re getting a competitive advantage on any export,” he said
“Obviously, exports have suffered quite a lot over the last year following Brexit – actually, this is a potential opportunity to increase exports.”
Francis added that some “niche manufacturers” could benefit but pointed out that just 15% of UK construction product manufacturing output was exported.
“The majority of the construction product manufacturers will suffer [from sterling depreciation],” he warned.