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Thursday, June 30, 2016

Construction sector heading for Brexit wall

The fate of the economy and that of the construction sector are intractably linked. That is why when recession hit in 2008 onwards, everybody was calling for big capital schemes to be put in place to keep things moving and to drag us out of the mire.

It is very disturbing therefore to read in the Independent today that the massive uncertainty created by the Brexit vote could mean that the UK construction industry will slam into a “brick wall” early next year.

The paper quotes an anonymous source who told them that since the shock referendum result was announced last Friday morning anxious international investors have already pushed the pause button on future UK infrastructure investments:

“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.”

The person said up to £20bn of planned infrastructure investment was at risk and that foreign sovereign wealth funds were among those pulling in their horns.

A huge question mark hangs over high-profile projects such as a third runway for Heathrow and the Hinkley Point nuclear power station in Somerset.

But the source said there are also growing doubts about the future of less well-known operations such as the London Gateway port in Essex, operated by Dubai’s DP World, which opened in 2013 and is still only half complete.

“We’re hearing grave uncertainty [about it]” said the source. “That was built on the premise of large scale container ships from around the world using that as a point where these giant ships would dock and smaller ships would [transport the goods] straight into Europe. Now it looks like those smaller ships will have to find alternatives. They’re already talking about Hamburg, Amsterdam, etc,” he said.

The source says the new outbreak of uncertainty was likely to engulf many other ambitious planned construction projects in the UK, including the Atlantic Gateway transport hub in Manchester and Liverpool.

The paper says that the infrastructure construction sector was stagnating even before the Brexit vote and that a third of firms have said the forthcoming referendum was already disrupting orders. 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 since last Friday.

They say that another industry fear relates to airports, particularly if the UK ends up dropping out of the Open Skies Agreement, which allows any EU airline to fly between any two points in Europe. This could severely hamper the UK. Their source believes that this could lead to the closure of one of London’s airports.

The absence of a post-Brexit plan on either side of the argument is making business very nervous indeed. Many are waiting to see what emerges before taking any permanent decisions. The paper says that US banks with European headquarters in London, such as Morgan Stanley, Goldman Sachs and JP Morgan, are waiting to see whether they are likely to retain “passporting” rights, post Brexit, which allows them to sell services across mainland Europe from the City of London. If not, they have signalled they would probably have to move offices, and jobs, to mainland Europe:

In another threat to the City, Francois Hollande, the French President, said this week the EU should insist the clearing of euro-denominated trades be done within the bloc. This could compel the London Stock Exchange’s LCH.Clearnet, which clears half of global interest rate swaps, to move out of London.

Analysts in Japan have said there is a 75 per cent chance Toyota and Honda could pull operations out of Britain if the country’s motor exports are hit with new EU tariffs. Ford has confirmed it may now cut jobs in the UK.

Around 80 per cent of UK manufactured cars are exported, with half going to other EU states. There are fears that UK manufactured cars could face a 10 per cent EU tariff.

What can and cannot be negotiated will be crucial in determining the safety of thousands of jobs across the UK. If the government gets it wrong we could see the virtual dismantling of London's financial sector, the loss of large numbers of manufacturing jobs and the stalling of infrastructure projects designed to bring the UK into the 21st Century and to stimulate the economy.
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