The Construction Sector In The United Kingdom Makes A Turnaround

The IHS MARKIT / CIPS UK CONSTRUCTION PMI published by the company on 04 February 2020 has revealed that the construction sector in the country has turned the tide on the slump it had been going through in the past few months. The sector, though still in the contraction zone, has contracted at the slowest pace since May 2019. The headline seasonally adjusted IHS Markit/CIPS UK Construction Total Activity Index increased to 48.4 in January 2020 VS 44.4 recorded in December 2019.However, it is still in the below 50 zone, where the index is characterized with a figure above 50 denoting expansion and a figure below 50 signifying a contraction.Â

The construction sector has been one of the most battered sectors of the British economy to have been affected by the Brexit ordeal. The Brexit referendum of 2016 put speed breakers on the growth of most of the industries in the United Kingdom. For three years, political and economic uncertainty made the British businesses wary about the future. Faced with the prospects of large-scale disruptions, businesses started to postpone/prune down their capital expenditures, leading to a fall in the construction and demand for commercial infrastructure in the country. The most affected was the commercial property market of London, which experienced negative growth during most of this period. The British Government also on its part was not able to significantly increase its expenditure on account of an impending economic downturn, which resulted in many of the existing Government financed constructions halting or slowing due to a trickling of reimbursements. On the corporate side, the effects of pre-Brexit jitters made several of the foreign institutional investors shy away from putting money into the construction industry, which also resulted in a slowdown. Many companies ,both domestic and foreign, which were planning to expand their businesses in the United Kingdom halted their decisions till better conditions prevailed. This put brakes on demand conditions in the industry and consequently on the pricing of properties and their rentals. The general British public also was adversely affected by the unfavourable economic climate which had been hovering over the United Kingdom for such an elongated period. The consumer sentiment indices, a key indicator of the general mood among the common British citizens, started to decline which, over the above period, forced them to postpone their non-essential expenditure to future periods when better conditions would prevail. This severely impacted the demand for housing in the country, with the advanced markets of London being the most affected and far-flung areas performing moderately better. Other than the businesses directly engaged in the construction activity or trading activity in the sector, other industries which derived their business from the construction industry were also severely impacted during this time with no signs of any improvement in sight. The biggest problem that the industry was facing and that was harming it the most was the constant bickering among the British Lawmakers and their European Union counterparts, who were unable to agree on the terms of withdrawal for a long time.

The atmosphere in the United Kingdom had become very difficult for both the Government and Bank of England to control. The Bank of England followed a loose monetary policy for the majority of the three year period from 2016 to 2019 without much response from the economy, which was caught in a gloom and was on a downward spiral. The situation came to such a point that the bank towards the end on 2019 had to warn that if it had to cut interest rates again, it could push the British economy into a liquidity trap, thereby harming the economy more than benefiting it. The solution, of course, lay with the policymaking class. Finally, towards the second half of 2019 policymakers showed some urgency and passed the Benn Act which ensured that the United Kingdom did not leave the European Union without an appropriate deal, which further ensured that business activity on both sides were not severely disrupted on account of the withdrawal. This was followed by the general elections that were conducted on 12 December 2019 in the United Kingdom, which witnessed the prime minister Boris Johnson winning with a majority. Prime Minister Johnson had prior to the general elections negotiated a draft deal with officials of the European Union for which he needed a majority support from the parliament for its passage. Previously such draft deals could not be passed by the Governments on account of lack of consensus among British Parliamentarians and also a lack of majority support. Both these events instilled confidence among the businesses and the average British citizen, who started to see his future brighter after the clarity brought about by the political events. Towards the end of 2019, many of the leading economic indicators, which had been in a long term downward spiral, started to reverse trends signalling a change in the mood of the country. The Bank of England, which, despite its several efforts, was unable to spur growth in the economy by cutting interest rates, saw the economy rebounding without any further action taken from its side. The bank which on 30 January 2020 was to decide on interest rate cuts, decided against it and kept its key policy rates unchanged despite an overwhelming consensus among economists that the bank will lower interest rates further.

Several other indexes like the Consumer confidence index, Purchasing managers index, Hiring numbers in the country, the price rise in the housing sector and increase in activities in the services sector were the overwhelming signs that the economy was finally picking up from the slump over the past few years. The pent-up demand from the previous years is finally pushing up economic activity in the country. Most importantly, the aggressive posture taken by Prime Minister Boris Johnson was fuelling the confidence of the general public in Britain. The Prime Minister in the address to the Nation of the Eve of Brexit day on 31 January 2020, asked the country to rise up and consider the event of breaking away from the European Union as a new beginning rather than an ending.

Within the IHS MARKIT / CIPS UK CONSTRUCTION PMI, the index is composed of the housing sector, the commercial construction sector and the civil engineering sector. Of the three sectors, the civil engineering sector registered the sharpest upturn followed by the housing sector, which was again followed by the commercial construction sector.