Impact of Brexit on the EU and UK Construction Industry

ABSTRACT

The UK Standard Industrial Classification of Economic Activities 2007 – SIC (2007), has defined the construction industry in accordance with division 41 to 43. This report provides an overview of research on the economic implications of a UK exit from the EU for the reasons being divided into many sectors. The analysis raised on a wider research project across nine alternative scenarios which assessed the macroeconomic implications of a UK exit from the EU for the UK and for rest of the world. This paper summarises the major findings of overview of UK construction industry along with the Economic implication of Brexit on it. It will also evaluate some challenges faced by small and large organization and the labour market and finally it will examine the practical application of Brexit on development with a suitable conclusion.

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INTRODUCTION

There are 28 European sovereign states and The European Union (EU) is a political and economic association of them. In the post-Second World War years, the establishment of the European Community traces its origin by six European nations with the intention of preventing the destruction of two world wars from happening again which is created by the Decision of leaving EU. The main aim of the European Community was to serve an economic cooperation which is closer on the European continent. Although, in the coming years the areas include such as refuge migration, justice, safety, energy, environment, and foreign policy, which is developing into a distinctive political organisation. cooperation has expanded and the EU began as a purely economic community. The key reasons behind the Britain want to come out of EU due main three points for which they were unhappy, Immigration, Payments and Sovereignty. The citizens of EU are free to work anywhere in the EU and in the Britain as it is a net importer of workers. Also, Britain was investing more into EU than it was receiving (about ₤10b. net). The Principal concerns for the Brexit is economy as it was doing well in terms of unemployment and GDP growth. In the last 5 years, it was a major surge from Bulgaria and Romania in immigration, and this immigrant are likely to come in a search for work.

Conservative PM David Cameron pledges to hold a referendum During political campaigns of 2013 and 2015, Simple in or out on EU membership. until the very end the “remain” side supported by PM Cameron has appeared heading for victory. But on June 23,” leave” beats “remain” by 52.5% to 47.5%, this leaving has deeply divided country in many aspects and immediately after the results Cameron announced that he will Resign.

Theresa May a Newly Elected Prime Minister pledges that, by the end of next March she will trigger Article 50 negotiations, and Once it is commenced, within two years of time the talks must concluded. The key issue is immigration thus the EU wants the free movement of people and Britain plans to impose limits. The adoption of World Trade Organization obligations will be a result if they fail to reach the agreement. The obligations are as follows

OVERVIEW OF UK CONSTRUCTION AND BUSINESS OPPORTUNITIES

Construction industry itself is a very diverse form of industry which includes activities such as mining, building materials, forestry, the manufacturing of goods and materials used for the building of construction, as well as maintenance operation and disposal, to the construction of infrastructure and buildings. The output in the UK Construction is more than £110 billion per annum and it contributes 7% of GDP (Government Construction Strategy). Approximately three quarters of the Construction output is from private sector and a quarter of output is from public sector.

There are three main sectors in the Government Construction Strategy:

• Residential (approximately 40%).
• Infrastructure (approximately 15%)
• Commercial and social (approximately 45%)

Approximately 40% of construction output is Refurbishment and maintenance while 60% of it is new builds. Approximately 10% of total UK employment which is 3 million jobs is in the Accounts Industry (Construction 2025) which includes both services and manufacturing. As Per the Department for Business Innovation and Skills, the industry is made up as follows:

• Products, 310,000 jobs, 18,000 businesses
• Contracting, 2,030,000 jobs, 234,000 businesses.
• Services, 580,000 jobs, 30,000 businesses.

(BIS, UK Construction, An economic analysis of the sector, 2013).

The performance of Construction industry is a good indicator of heath of the wider economy because it is high cost, high risk and long-term activity. When the economy of country fluctuate, construction Investments can Stand Still,, but when the economy begins to recover, the industry can overheat quickly.

REVIEW OF BUSINESS THEORIES

Brexit would have critical outcomes generally for the property industry and economy, believed Andy Hill, chief executive at housebuilders Hill. With more than one million required by 2020, It is widely acknowledged that we need to build more homes more quickly. Developers are likely to move away from building more homes without investment coming into the UK at current levels and this figure will be incredibly difficult to meet the significant diminishing demand. While Jacqueline O’Donovan, managing director of O’Donovan Waste Disposal, there will be a huge amount of uncertainty within the construction sector if Britain leaves the EU, “we try to figure out what the decision means for our industry”. If we leave the biggest trading union in the world, there will be an impact on investment. Companies investing in safety technology for their fleet and training for their drivers which is important for the industry to grow and thrive, it will be a knock-on discouraging effect.

There is a concern that the construction sector is struggling to pick up power because it is worried about the poll argues Kalpana Padhiar. In the last six months, as the input costs is inflating and remaining lower in margin, settlement contracts, together with global economic against with the growth, forecast for construction has already been downgraded three times and continue to take their toll. There is simply too much at stake for the UK to leave the EU, says Matt Ainscough, CEO of Wigan-based national engineering company Ainscough Industrial Services (AIS). “Closing the door to the access of these funding streams on UK innovation would have a very negative impact,” the effect of Brexit would be the loss and most damaging funding of EU, says Wilson.

A contribution of £24 million to a £50 million regeneration fund for Scotland in 2011 and a similar investment in Wales done by UK includes an Examples that the €755 million committed to the North West between 2007 and 2013, the most of the major extending regeneration and social housing retrofitting schemes around the UK with a list which will still goes on. In fact, UK is one of the biggest net beneficiaries of EU’s funding schemes. Leaving the EU group directly means to prohibit themselves from this incoming investment.

OVERVIEW OF ECONOMIC IMPLICATION OF BREXIT ON CONSTRUCTION INDUSTRY

A layer of security from the UK’s construction industry could remove Uncertainty surrounding the global economy, taxation and access to funding. This unwilling to take risks in an unknown financial landscape which potentially could lead to an increase in conservatism practiced by construction executives. As compared with December 2015, output in the construction industry decreased by 0.2% in January 2016. while all repair and maintenance increased by 0.8%, all new work decreased by 0.8%. Within all new work, and infrastructure (-8.6%) which was similar to the increases in private commercial (4.7%), there were decreases in public new housing (-10.6%), other new work (1.6%), private industrial (0.7%) and private new housing (0.6%). Housing repair and maintenance increased by 3.0% while there was a decrease of 1.5% in non-housing repair and maintenance.

Compared with January 2015, there were decreases of 0.4% and 1.4% in both sector of all new work and repair maintenance and output decreased by 0.8% in the construction industry respectively. In Quarter 4 (Oct to Dec) 2015 new orders for the construction industry were estimated to have decreased by 0.5% compared with Quarter 3 (July to Sept) 2015 and compared with Quarter 4 (Oct to Dec) 2014 increased by 1.4%. In Quarter 4 (Oct to Dec) 2015 published on 25 February 2016 which showed a decrease in output of 0.4% included an estimate of construction which is the second estimate of gross domestic product (GDP). In this release the estimate has been revised upwards by 0.7% points to an increase of 0.3%. up to 1 decimal place this has no impact on GDP. For the value of work (produced during the reporting period) the amount charged by construction companies to customers and payments to sub-contractors excluding VAT is defined as the Output. Construction output within Great Britain are evaluated as a short-term indicator by private sector and public corporations of construction output. Due to concerns about the quality of these deflation, the UK Statistics Authority decided to announce for the suspension on designation of Construction Cost and Price on 11 December 2014.

As National Statistics in respect of the Code Practice for Official Statistics, resulted by announcing the decision to suspend the Output and New Orders. The Department of Business Innovation and Skills (BIS) on 1 April 2015, announces that they will take responsibility for the publication of the Construction Price and Cost Indices.

To measure the price of output and replace the statistical models which has been used in the production of chained volume measures (CVMs) for output in the construction industry since Quarter 3 (July to Sept) 2014 from this point they have worked towards creating an interim solution and to provide a continues source of data from Quarter 1 (Jan to Mar) 2014 onwards. For all periods from January 2014 this Interim Solution was included in the data published in June 2015.

EVALUATION OF CHALLENGES OF BREXT ON CONSTRUCTION INDUSTRY

 Several serious challenges have been face by the UK construction industry:

Urbanization

The population who lived in urban areas was only 13% in 1900. But now over half of the planet’s population lives in cities. These densely occupied areas which are densely occupied should be more supportable than more distributed to rural settlements however in reality the consumption of non-renewable resources account are more than 75%, which create around three quarters of global population. More than 70% of them will live in cities by the second half of the century, and at the same time global population will increase from 7 billion to around 9.5 billion. If this constant growth is going to be accommodate than the design and construction needs should become much smarter and at the same time overall consumption should also be reduced.

Climate change and Sustainability

As compared to 1990 levels, the UK government has committed to cut greenhouse gas emissions to 80%, and divide them into two equal parts by 2025. If the government commitment is to be met, buildings accounted for about 43% of all the UK’s carbon emissions, then buildings must become considerably more efficient.

along with two thirds of the housing that will be occupied in 2050, This is becoming trickier by the fact that 80% of the UK building stock has already been built that will exist in 2025. However, government policy seems to be contrary to these goals of green deal dropping plans and zero carbon homes. The Government Construction Strategy has set in motion for two major initiatives:

• By the end of the parliament an intention to achieve savings of 15 to 20%.
• By 2016 centrally-procured Construction contracts is a requirement for fully-collaborative 3D BIM on all projects.

The performance of buildings is not well anticipated as it was practice at the design stage and this shows as significant evidence to be suggested. The performance gap is also known as the difference between anticipated and actual performance. It is indicated that the actual energy consumption in buildings will usually be twice as much as predicted is Found from the PROBE studies (Post Occupancy Review of Buildings and their Engendering). It is concluded that in-use energy consumption can be 5 times higher than compliance calculations which is a recent finding from Carbon Trust Low Carbon Buildings Accelerator and the Low Carbon Buildings Programmer.

Typically, these members of construction industry like a client, consultants, contractor, sub-contractor and supplier will generally be procured by following one of the five main procurement route:

• Traditional contract
• Design and build
• Construction management
• Public management
• Management contract

EVALUATE EFFECTS OF BREXIT ON CONSTRUCTION LABOUR MARKET IN UK

With a remarkable number of skilled and non-skilled differentiation filled by the non-UK nationals the free movement of labor between the UK and other EU member states is a valuable asset to the construction industry. The accounts of around 3m jobs in the UK which is in the Construction Industry only and a significant number of these professionals are from other EU member states which means 10% of the total employment in UK. Skilled construction labors who previously have considered of coming to the other country for work might find it simpler to get work in France, Germany or Spain,” if the UK is willing to leave the EU explained by Manchester. Mark Webb, chairman of the property and construction group at Smith & Williamson explains it is less shocking if easy access to labor and flexible working is provided, “When considering that the key components of the sector are also cornerstones of the EU”.

Paul Payne, managing director of construction and rail recruitment specialist asks, “Why would workers struggle across to Britain with strict emigration laws?”. In a field like construction where new developments and green initiatives impact the way of working and the ability of gaining experience from across the continent of EU and the construction workforce could be a loss on gathering new insight and skills. On the counterpart EU is highly beneficial in staying ahead of the curve,” he says. For small contractors and business owners the cost of labor to rise is a worrying notion. Monika Slowikowska, founder of Golden Houses Developments, explains that the current cost of construction has increased by average 8% on labor cost in the last six months and is set to keep on rising.

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The professionals of UK may have permission to a bigger selection of roles in the construction industry without the competition of construction workers travelling from the continent. However, some supporters of the leave EU campaign says that  splitting from the EU could benefit UK labor force The EU can simplify the process of importing resources, like the freedom of movement for labor, tools and materials from other member states.

A higher acquisition costs could lead to be a reason of restriction on materials and resources. The cost of professional construction services would be increase subsequently. Any homeowners/businesses/organizations looking to employ any such services, the impact of this change would affect to those who are working within the construction business.

Slowikowska it becomes more difficult for the 27 member countries to invest in and do business with due to the reason that a UK that’s not part of the EU. To negotiate new arrangements with the 27 countries either collectively or individually once Out,  it could take several years for the resettlements.

EVALUATION OF BREXIT ON CONSTRUCTION ORGANIZATION SUPPLY AND TRADE WITH OTHER COUNTRIES.

UK does Imports some building materials, from the four largest markets for import which is Germany, China, Italy and Sweden, Although the UK construction industry uses mainly domestic materials. the continuing free movement of goods is a concern for the industry because with three of these being in the EU. This on the other hand completely depends on how the relationship is going to be in between the UK and the EU, but there has been some suggestion that the World Trade Organisation rules which could increase costs, it could require compliance from them.

For the marketing of construction products in the EU the Construction Products Regulation 2011 lays down harmonised rules for Exports. the UK would still require to comply with the Regulation for products exported to the EU, While the Regulation would no longer apply to the UK after Brexit. A need for the UK to comply with regulations in relation to which UK had no powers of negotiation would be a result in the end. In the event of a Brexit some people suggests that the UK would be able to trade more with the rest of the world.

However, as a part of the EU the UK would have to set up unilateral trade agreements to replace the multilateral agreements to trade under. Some countries have strict trade barriers notably the USA, and only countries that they have agreements with them can export there. While the UK is currently able to trade with such countries, as the EU has those agreements with its place, in the event of a Brexit new agreements would have to be negotiated.

Goods, Services, Investment, Limited obligations, Immigration, no obligations as stated in the General Agreement of Trade in Services (GATS) Britain would face EU Most Favoured Nation (MFN) tariffs (and vice versa) Obligations. The effect of Brexit on Vulnerable Sector will be on passenger vehicles like Car manufacturing in UK is 1.2 to 1.6m of vehicle are exported. MFN tariff of EU is 10% and need of Reciprocal for both EU and UK is access to entre in both vice versa, Similarly this all will have an impact on the Construction Industry and can also create challenges for the small or large scale construction organization which will directly effect on the construction labour market in the UK due to having many labours from EU countries.

CONCLUSION

With the cost of services potentially increasing and the speed of new jobs slowing, the knock-on effect of an exit could be dramatic. Not only would the construction industry be affected, but also those who are reliant upon the services it provides would be affected at a large percentage. The impact could be immediate, and significant from first-time property buyers to large corporations. However, the EU may not be perfect, but a huge amount of vote to leave the EU could cause a high level of damage which may take years to settle. UK would be the first-ever country to leave the EU, though it doesn’t have a blue print to base it on and it is not enough only possibility if they are going on hope and nostalgia alone. Furthermore,  what exactly would happen is depending on Brexit occur until than it is impossible to predict, “We’ll simply have to wait and see,”.

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