brexit and the outlook for construction. w3 an... · brexit and the outlook for construction...

Brexit and the outlook for Construction

Richard ThrelfallPartnerUK Head, Infrastructure, Building and Construction

February 2017

The Brexit Paradox

It was supposed to be a meltdown, but…

3Document Classification: KPMG Public

© 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Sentiment has picked up since the EU referendum vote

Purchasing Managers Index(Composite, Construction, Manufacturing, Services)

Source: Markit

40

45

50

55

60

65

70

06/11 12/11 06/12 12/12 06/13 12/13 06/14 12/14 06/15 12/15 06/16 12/16

Construction Manufacturing Services Composite



UK equities have shrugged off Brexit and Trump

Source: Bloomberg

FTSE 100

2500

3000

3500

4000

4500

5000

5500

6000

6500

7000

7500

11/01 05/03 11/04 05/06 11/07 05/09 11/10 05/12 11/13 05/15 11/16

FTSE

100



Though performance is a function of external exposure

Source: KPMG analysis, Bloomberg, Capital IQ and Thomson Reuters Datastream

1.15

1.25

1.35

1.45

1.55

1.65

1.75

1.85

80

85

90

95

100

105

110

115

120

125

23-J

un

30-J

un

07-J

ul

14-J

ul

21-J

ul

28-J

ul

04-A

ug

11-A

ug

18-A

ug

25-A

ug

01-S

ep

08-S

ep

15-S

ep

22-S

ep

29-S

ep

06-O

ct

13-O

ct

20-O

ct

27-O

ct

03-N

ov

10-N

ov

17-N

ov

24-N

ov

01-D

ec

08-D

ec

15-D

ec

22-D

ec

$US

% C

HAN

GE

Performance of KPMG indices since Brexit vote

KPMG UK 50 KPMG Non-UK 50 GBP: USD



70

120

170

220

270

70

75

80

85

90

95

100

105

23/06/2016 23/07/2016 23/08/2016 23/09/2016 23/10/2016 23/11/2016 23/12/2016

AXFT

SE A

LL W

OR

LD $

KPM

G IN

DIC

ES $

Performance of KPMG indices since vote, in dollars

KPMG UK50 $ KPMG Non-UK50 $ FTSE all world $

And removing the exchange rate effect changes the picture

Source: KPMG analysis, Bloomberg, Capital IQ and Thomson Reuters Datastream



Retail spend has proved remarkably resilient

Source: ONS

Retail Sales(Retail Sales: All Retailing including Automotive Fuel (SA,2013=100))

-6

-4

-2

0

2

4

6

8

10

06/97 12/98 06/00 12/01 06/03 12/04 06/06 12/07 06/09 12/10 06/12 12/13 06/15 12/16

YoY

% c

hang

e



Fuelled by low interest rates

Source: Bank of England

UK Bond Yields and BoE rate

0

2

4

6

8

10

12

14

16

18

01/84 01/86 01/88 01/90 01/92 01/94 01/96 01/98 01/00 01/02 01/04 01/06 01/08 01/10 01/12 01/14 01/16

%

3 Month Interbank Lending rate (%) Official Bank Rate (%) 10 Year Bond Yield (%)



Exports are benefiting from the 18% fall in sterling in 2016

Source: Bank of England

70

75

80

85

90

95

Sterling exchange rate (effective exchange rate index, 2005=100)

Pre-referendum pricing in possibility of Brexit vote

23rd

June

“Hard Brexit” worries come and go



USA, £127,828

Other North America, £10,743

Japan, £15,080

Australia, £15,483

Germany, £50,324

Netherlands, £43,240

France, £38,278

Ireland, £32,179

Belgium, £20,186

Italy, £16,555Spain, £15,611

Other Eurozone, £22,143

Other Europe, £71,263

China, £15,104

Russia, £12,791

India, £9,133

Brazil, £6,644

Other Asia, £57,517

Other Australasia, £2,232 Middle East, £31,371

Africa, £29,510

South America, £20,535

Exports by trading partner in 2012£ millions

But nearly half of UK exports go to Europe



& trade deficit suggests the fall is likely to prove permanent

Source: ONS, The Pink Book

Abolition of exchange controls

Fixed exchange rates Floating exchange rates

UK current account balance (% of GDP)

So it will all be ok then?

Well, not really…



Raw materials cost has risen 12% as sterling has weakened

Source: ONS

Manufacturing input prices



Leading to a 2% increase in output prices

Source: ONS

Manufacturing output prices



Driving increases in inflation and reducing real wages

Source: ONS, KPMG projections

CPI - InflationConsumer Price Indexes (2015=100)

-1

0

1

2

3

4

5

6

7

8

9

01/89 01/91 01/93 01/95 01/97 01/99 01/01 01/03 01/05 01/07 01/09 01/11 01/13 01/15 01/17 01/19 01/21

YoY

% c

hang

e

CPI - Historical CPI - Forecast



Real retail sales have outpaced real wages since 2010

Source: ONS

95

100

105

110

115

120

125

130

135

140

145

150

Jan 2000 Jan 2002 Jan 2004 Jan 2006 Jan 2008 Jan 2010 Jan 2012 Jan 2014 Jan 2016

Retail sales Real wages

The old normal Recession Recovery



Funded by a fall in savings

Source: ONS

Household savings ratio(savings as a percentage of household disposable income)



Acknowledged by Government in lower growth forecasts

Source: OBR Economic and Fiscal Outlook, November 2016

Impact on construction

Divides the industry into winners and losers



Construction output reflects GDP & Government policy

Source: ONS, Economist Intelligence Unit and Mintel

-20%

-15%

-10%

-5%

0%

5%

10%

15%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Annu

al c

hang

e (%

)

GDP Construction excl public Construction (incl. Public)

Commercial

Is likely to suffer under all scenarios



Commercial is already the weakest construction segment

Source: IHS Markit / CIPS



And private investment is being stalled by uncertainty

Source: KPMG Forecast

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

2016 2017 2018 2019 2020

Year

-on-

year

cha

nge

(%)

UK investment forecast (percentage change year-on-year)

Infrastructure

Will keep the lights on



Government infrastructure spend is forecast to rise

0.80%

0.82%

0.84%

0.86%

0.88%

0.90%

0.92%

0.94%

0.96%

1500

1600

1700

1800

1900

2000

2100

2200

2015 2016 2017 2018 2019 2020

GDP £bn nominal (from OBR) Gov infrastructure spend as a % of GDP

Source: HMT “Investing in Britain’s Future”, June 2013; Office of Budget Responsibility



But spend is concentrated on road and rail

Source: HMT “Investing in Britain’s Future”, June 2013

-

5

10

15

20

25

Network Rail Schools HS2 HighwaysAgency

LocalAuthority

RoadMaintenance

LondonTransport

Housing LocalAuthority

MajorProjects

Other

£bn

Total UK Government forecast spend over period 2015/16 – 2020/21



Energy dominates the overall infrastructure pipeline

0

20

40

60

80

100

120

140

160

2014/15 2016-2018 2019-2021 Beyond 2021

Communications Energy Flood Science and Research Transport Waste Water

£billi

on

Source: National Infrastructure Pipeline

Housebuilding

Depends on Government policy



House price valuations continue to diverge by region Regional house price to income ratios for all buyers(Halifax House Price Earnings Ratio)

Source: Halifax, Haver

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Q2-83 Q4-84 Q2-86 Q4-87 Q2-89 Q4-90 Q2-92 Q4-93 Q2-95 Q4-96 Q2-98 Q4-99 Q2-01 Q4-02 Q2-04 Q4-05 Q2-07 Q4-08 Q2-10 Q4-11 Q2-13 Q4-14 Q2-16

Greater London South East South West East AngliaWest Midlands East Midlands Wales North West



But interest rates are low, so mortgages remain affordable

Source: Council of Mortgage Lenders

Mortgage interest payments relative to income(per cent)

8.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

26.0

28.0

All mortgages

First time buyers



Supply side gap remains the fundamental constraint

Source: Shelter / KPMG “Building the Homes We Need” 2014

400 Labour

Conservative

Labour

Con

Labour

Conservative

Labour

Coalition

£400,000

350 £350,000

300 £300,000

250,000

Nominalhouseprice

£250,000

New

dwel

lings

pery

ear(

thou

sand

s)

200Localauthorities £200,000

Nom

inal

hous

epr

ice

150Housingassociations £150,000

100

Privatemarket

£100,000

50 £50,000

1946

0

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2013

0

House building since 1946

Employment & Skills

Is the major risk (and opportunity)



Unemployment levels are at an historic low

Source: Haver

Unemployment and Wages(Unemployment rate and average weekly earnings)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

-8

-6

-4

-2

0

2

4

6

8

10

08/00 09/01 10/02 11/03 12/04 01/06 02/07 03/08 04/09 05/10 06/11 07/12 08/13 09/14 10/15 11/16

YoY

% c

hang

e in

ear

ning

s

Total Pay (inc. bonuses) Regular pay Unemployment rate (RHS)



So construction labour shortages will persist

At least 20% more labour

required than available

51% deficit in training

provision

70%of Nine Elms workforce is

non-UK nationals

Source: LCCI – KPMG Skills to Build 2014 Construction Skills Index, November 2014

London and South East construction labour estimates 2014 - 2017(Blue = pipeline; orange = estimated)



Economic growth has come from rising employment

Source: ONS

92

94

96

98

100

102

104

2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1

Real GDP and Employment2008 Q1=100

Real GDP Employment

GDP growth = employment growth plus productivity growth

Employment

GDP

Productivity



And productivity remains a major issue

Source: ONS

Productivity performance, 2010-2014 average (current prices, UK=100)

80

90

100

110

120

130

140

Irela

nd US

Belg

ium

Net

herla

nds

Italy

Fran

ce

Ger

man

y

Spai

n

Can

ada

UK

Japa

n

GVA per worker GVA per hour worked



Especially in construction

Source: ONS

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

UK productivity (1997 Q1 = 100)

Economy Construction

Key issues and challenges



Key Strategic Issues for the construction industry

Industry skills need and gap1

Technology opportunity2

Leadership, voice and Industrial Strategy3

Industry structure and initiatives to drive reform4

Potential for consolidation5

brexit and the outlook for construction. w3 an... · brexit and the outlook for construction...

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