Rocky financial markets: Tread carefully

On-going global financial market volatility will seriously impact the UK construction industry. This is because it doesn’t exist in isolation but is a cog in a much larger machine which can be dramatically affected by the slightest influence of positive and negative forces.

Market conditions are already very challenging with the industry still facing up to public sector spending cuts, little evidence of private sector recovery and the stalling recovery of the manufacturing sector.

The implications of the rating agency downgrade on the US long-term sovereign debt rating will have a major effect on UK construction for the foreseeable future. The downgrade sparked a stark decline in global equity prices and construction relies upon substantial capital availability and investment. The current uncertainty has made both individuals and organisations either unwilling or unable to raise capital for construction projects.

It is pleasing to note, however, that construction has declined at a much lower rate than anticipated and today confidence in the industry is strong. As a whole it is increasingly cash-rich and less financially stretched than in 2008. Consequently it is much better prepared to withstand future economic challenges. Of concern, however, is the construction industry’s exposure to the European liquidity situation. This has reduced confidence in the market and its ability to attain the required capital investment for opportunities. Continued reluctance from UK domestic lenders to grant mortgages is also a concern, coupled with declining general consumer confidence.

The impact of public sector spending cuts also continues to feed through into the industry causing a further reduction in workload. Nonetheless there are positive signs in the affordable housing market. By comparison, the anticipated recovery in private construction has yet to materialise. Commercial work continues to decline too but the sector still has strong performers such as infrastructure which leads the growth statistics.

The government has continued to invest in infrastructure but the speed with which this investment will bear fruit is substantially slower than ideal. What has been welcomed by the market is the publication of the government’s construction strategy which sets out for the first time a clear path that the government wishes to follow. Over the long term this document should provide focus and direction for the industry, leading to increased co-operation and confidence.

On the downside the government has not signalled any new initiatives, many of those proposed having occupied the agenda for some time. The government needs to increase the scope of its mid- to longer-term strategy to ensure the industry retains a long-term vision.

There is an air of uncertainty in the construction industry as reflected by the diversity of opinions of industry commentators and statistical agencies.

What they do all assert, however, is that the current European sovereign debt crises must be tackled before a realistic plan to nurture economic growth can be set in place.

It is still too early to predict an upturn in market conditions. The industry may now be leaner and fitter than previously but we will continue to be highly susceptible and responsive to any further likely reductions in workload.

Given the problems facing the overall global and UK economies - principally unsustainable debt levels, rising prices and falling incomes - the outlook of minimal growth should be considered realistic. If growth levels remain low, then construction market confidence will remain subdued. Most of the sectors identified as likely to lead growth - such as green businesses and manufacturing - are too small to realistically impact on growth rates in the way that they could have done during past recessions.

Without doubt economic stability is the solution. Given the current situation, there are still many hurdles to clear before we can begin to see confidence within the industry about the future.

Ken Gillespie is group managing director of construction at Galliford Try