The UK construction industry is bracing itself for a likely downturn in the coming months. Recently published PMI data for July shows a decline in construction output for a third month running and in orders for a fourth. Continuing political uncertainty and a subdued economy are contributing to a fall in demand and a general decline in confidence regarding the outlook for the next twelve months. Combined with rising costs and labour shortages, the outlook is somewhat gloomy at present. There is a real risk that a downturn could gather pace, particularly if the UK crashes out of the EU with a no-deal Brexit.
Trades in short supply
The Federation of Master Builder’s (FMB) second quarter State of Trade Survey shows that employment has fallen for the first time in over five years among smaller construction companies as they look to protect themselves from the anticipated downturn. The number of direct employees is falling while the use of sub-contractors is increasing. Main contractors see the use of subbies as a tap that can be turned on and off as required giving them more flexibility when things become difficult.
Skills shortages remain an issue, with 60% of companies reporting difficulty recruiting bricklayers, 54% carpenters and 40% plumbers. This could potentially become a lot worse if the supply of migrant workers, on which the industry depends, dries up post-Brexit. A prolonged preference for sub-contract labour over directly employed staff will result in fewer apprentices and trainees and will exacerbate the shortage of skilled labour in the future.
What are the causes?
For an industry that has always depended heavily on market confidence, UK construction can’t help but be affected by the uncertainty surrounding Brexit. It is impossible to predict with any degree of certainty where the UK will find itself even a few months into the future so it’s not surprising that clients and investors are preferring to bide their time before committing to new projects.
With around 60% of construction materials coming from EU sources, the introduction of tariffs, together with the effect of a weaker pound, could lead to significant increases in costs and delays to projects. For contractors working on small profit margins, this could have a serious impact and for developers considering new projects it makes financial planning a stab in the dark.
In an article published last week, the FMB have suggested that the planned introduction of Reverse Charge VAT in October should be delayed. They are concerned that it will restrict cashflow which, combined with the government’s Making Tax Digital initiative and an increasingly likely no-deal Brexit, would be difficult for smaller construction companies to deal with.
With so much uncertainty, what the future holds is anyone’s guess. It does seem, however, that the signs are pointing towards a potential prolonged downturn. Much will depend on the outcome of Brexit and whether the government takes any action to stimulate the industry such as reducing VAT or speeding up the planning process.