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December 19, 2019

Construction to receive small boost from election result, but Brexit uncertainty remains

GlobalData believes construction output growth in 2020 will be slightly better than previously expected, at 1%, before recovering to a healthier rate of 2.5% a year in 2020-2023.

The UK’s construction industry has suffered from political uncertainty in the past two years, with output growth slowing to an average of just 0.5% in 2018-19.

The decisive outcome of December’s general election will provide the industry with confidence the new government will be in a strong position to push through its policy agenda, particularly on the vital issue of the UK’s exit from the EU.

However, there will still be significant challenges ahead as the industry will need to adjust to operating outside of the EU under new trade and investment deals.

The most likely outcome is that parliament will approve prime minister Boris Johnson’s Brexit withdrawal deal ahead of the 31 January 2020 deadline, leading to a transition period during which the UK and the EU will negotiate a new political and economic relationship. Mr Johnson has stated he would not extend the transition period beyond 31 December 2020.

By avoiding the “no-deal” Brexit scenario (the worst-case scenario in terms of the impact on the UK’s economy), investor confidence could improve, potentially resulting in the resumption of stalled construction projects. For this reason, GlobalData now forecasts that construction output growth in 2020 will be slightly better than previously expected, at 1%, before recovering to a healthier rate of 2.5% a year in 2020-2023.

However, although the election on 12 December has brought about a positive outcome in terms of renewed government stability and ensures that Mr Johnson will be able to pursue his Brexit objectives, it still remains unclear exactly when and under what conditions the UK will leave the EU.

Therefore, investments in industrial and commercial construction, particularly for speculative developments in offices, retail and hospitality buildings, could be constrained.

Infrastructure remains a key source of growth in construction activity, supported mainly by large-scale investments in public infrastructure projects through government flagship programmes, such as the National Infrastructure Plan. In the first 10 months of 2019, infrastructure construction expanded by 7.4% year on year. Total residential construction growth also remains positive, and the government will push ahead with a house building agenda. In January-October 2019, housing construction was up by 4.9% year on year, but much of this growth was driven by public housing (up by 15.4%), with private housing projects posting growth of 3.3%.

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