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Brexit: Infrastructure spending falls by 20% after EU referendum

The economic uncertainty following the EU referendum could prevent investors from putting money in infrastructure projects

Zlata Rodionova

Monday 22 August 2016 15:50 BST

(PA)

Spending on infrastructure in the UK has declined sharply since the country voted to leave the EU, new figures have shown.

The first full month following the Brexit vote saw a decline in the infrastructure sector, with the value of construction contracts for July falling by 20 per cent to £1.5 billion, according to consultancy group Barbour ABI, which also provides figures to the Office for National Statistics.

The figure was 23 per cent lower than in June and represents a 23 per cent drop compared to the same period last year. Housebuilding also fell sharpely with some 2000 fewer houses started in the UK in July, compared to the previous month.

The figures will offer little comfort to prospective homeowners after a damning report from the Resolution Foundation earlier this month revealed that home ownership has fallen to its lowest level for 30 years. The research shows supply has failed to keep pace with demand in the UK, shutting buyers out of the market.

Michael Dall, lead economist at Barbour ABI, said that the economic uncertainty following UK’s vote to leave the EU could be discouraging investors from spending on infrastructure projects.

“In the first full month since the vote to leave the European Union, the value of construction projects reaching contract award stage declined in July. This is unsurprising given the uncertainty in the economy,” Dall said.

“However, it is the infrastructure sector which has performed particularly poorly this month, and with the change in narrative from the current government, it puts more emphasis on any fiscal stimulus that they may be planning to make,” he added.

Still, the value of contracts for commercial office construction in July, increased by 22 per cent compared with June, according to Barbour ABI.

The infrastructure construction sector UK shrank at its fastest pace since 2009 after the UK voted to Leave the EU, according to the monthly Markit/CIP survey for July.

The index measures new orders, deliveries and employment, among other things, and is considered a key indicator in the confidence of the construction sector.

The July reading signalled the fastest overall decline in construction output since June 2009. This largely reflected the steepest fall in commercial building for over six-and-a-half years, alongside a drop in civil engineering activity for the first time in 2016. (Markit)

Construction accounts for around 7 per cent of UK GDP and civil construction companies such as Balfour Beatty and Carillion have seen double digit falls in their share price in the week following the EU referendum.

An industry source previously warned the Independent that the UK construction industry will slam into a “brick wall” early next year due to the massive uncertainty created by the Brexit vote.

6 ways Britain leaving the EU will affect you

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1/66 ways Britain leaving the EU will affect you

6 ways Britain leaving the EU will affect you

More expensive foreign holidays

The first practical effect of a vote to Leave is that the pound will be worth less abroad, meaning foreign holidays will cost us more

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6 ways Britain leaving the EU will affect you

No immediate change in immigration status

The Prime Minister will have to address other immediate concerns. He is likely to reassure nationals of other EU countries living in the UK that their status is unchanged. That is what the Leave campaign has said, so, even after the Brexit negotiations are complete, those who are already in the UK would be allowed to stay

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6 ways Britain leaving the EU will affect you

Higher inflation

A lower pound means that imports would become more expensive. This is likely to mean the return of inflation – a phenomenon with which many of us are unfamiliar because prices have been stable for so long, rising at no more than about 2 per cent a year. The effect may probably not be particularly noticeable in the first few months. At first price rises would be confined to imported goods – food and clothes being the most obvious – but inflation has a tendency to spread and to gain its own momentum

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6 ways Britain leaving the EU will affect you

Interest rates might rise

The trouble with inflation is that the Bank of England has a legal obligation to keep it as close to 2 per cent a year as possible. If a fall in the pound threatens to push prices up faster than this, the Bank will raise interest rates. This acts against inflation in three ways. First, it makes the pound more attractive, because deposits in pounds will earn higher interest. Second, it reduces demand by putting up the cost of borrowing, and especially by taking larger mortgage payments out of the economy. Third, it makes it more expensive for businesses to borrow to expand output

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6 ways Britain leaving the EU will affect you

Did somebody say recession?

Mr Carney, the Treasury and a range of international economists have warned about this. Many Leave voters appear not to have believed them, or to think that they are exaggerating small, long-term effects. But there is no doubt that the Leave vote is a negative shock to the economy. This is because it changes expectations about the economy’s future performance. Even though Britain is not actually be leaving the EU for at least two years, companies and investors will start to move money out of Britain, or to scale back plans for expansion, because they are less confident about what would happen after 2018

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6 ways Britain leaving the EU will affect you

And we wouldn’t even get our money back

All this will be happening while the Prime Minister, whoever he or she is, is negotiating the terms of our future access to the EU single market. In the meantime, our trade with the EU would be unaffected, except that companies elsewhere in the EU may be less interested in buying from us or selling to us, expecting tariff barriers to go up in two years’ time. Whoever the Chancellor is, he or she may feel the need to bring in a new Budget

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“Construction projects that are underway are going to continue. It’s six to seven months down the line where a lot of projects are going on to ice,” said the source. “What you’ll find is the construction industry potentially running into a brick wall.”

“There’s a danger of a huge drop off. And if this is the situation for two years [the assumed time for the UK-EU divorce terms to be negotiated] that’s an awful long time for construction companies.”

In July, new Chancellor Philip Hammond hinted that the Government was prepared to increase borrowing to boost infrastructure spending.

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