FMB warns of post-Brexit increase in material costs
Concerns over the rising costs of construction materials could be exacerbated by a weakening currency following the EU referendum result, the Federation of Master Builders (FMB) has warned.
A survey by the small and medium-sized builder membership body revealed that construction activity has improved for its members in Scotland. Based on a composite indicator of current and expected workload, and business inquiries the poll found that a jump of 15 percentage points took Scotland’s net balance to +21, the highest reading since Q4 2007.
Published yesterday, around 12 per cent of weighted responses to the FMB’s State of Trade Survey results for Q2 2016 were negative, down from 20 per cent, while the share of weighted responses which were positive went up to 33 per cent from 26 per cent. The majority of weighted responses (55 per cent) were neutral, marginally up on the 54 per cent recorded in the previous quarter.
However, the FMB said that the survey covered the period before the EU referendum, and looking forward it had concerns about material price inflation due to the plummeting pound.
Brian Berry, chief executive of the FMB, said: “Following the EU referendum, the plummeting value of sterling has further complicated an already difficult situation for small construction firms. Even prior to the referendum result, nearly two in three bosses were anticipating rising material costs, on which there has been intense pressure over the past couple of years, as demand for projects has picked up again. With the dramatic fall in currency value however, we’re concerned that the trend towards price inflation will gather pace. We’ve already heard accounts of timber and brick costs rising, and a number of sources have said that even steel prices have risen by 8 per cent since the decision was made to leave the EU.”
Detailing the impact of the Brexit vote could have on Scottish construction sector activity, FMB Scotland director Gordon Nelson told said: “The referendum result was not widely foreseen, and will undoubtedly impact upon business and consumer sentiment over the second half of this year.
“Scottish construction SMEs (small and medium-sized enterprises) are in a much stronger place to deal with any uncertainty generated by Brexit than they were a few years ago, but will be concerned that the hard-earned gains they’ve made will be jeopardised by retrenching consumers who may put off making significant investments in the short term.”
Mr Nelson called on the Scottish Government to “provide a clear blueprint detailing what steps it will take to ward off any potential economic downturn”.
He claimed there was a need for a “renewed focus on improving public procurement processes for smaller firms” so they could benefit to a greater extent from public spending. He voiced a belief that heavy spending by the Scottish Government on housing and infrastructure in the past few years had not “filtered through enough” to SMEs.
Mr Nelson flagged particular weakness in the construction sector in Aberdeenshire, which has seen its economy hit hard by the oil and gas sector’s woes.
He said: “The challenges the area are facing as a result of the oil industry flagging have been well documented, but these industry-specific difficulties are starting to have a pronounced effect on the construction sector in the area, for both firms linked to the energy sector and also those reliant on homeowner work.”
Mr Nelson noted that, unlike larger firms, SMEs in the Aberdeenshire construction sector were “unable to simply refocus their energies elsewhere”.
He called on the Scottish Government to consider how it can support such firms through publicly-funded building programmes for which they can bid.
Mr Nelson added: “Otherwise, these construction SMEs may go to the wall and exacerbate an already difficult situation within the local economy.”
On the UK-wide front, Brian Berry said: “Combined with the continuing skills shortages shown in our survey results, which puts upwards pressure on salaries and wages, the costs associated with running a small construction firm are on the rise. Too many are already operating on razor-thin margins and are forced to tender at prices which barely return a profit in order to remain competitive. This leaves little capacity to absorb dramatic price increases.
“The results show that firms were already pencilling in escalating costs for the coming months, but few will have anticipated a 9 per cent percent drop against the Euro and 12 per cent against the American Dollar. The UK construction industry is heavily reliant on imported products and materials so this situation is very concerning indeed.”
He added: “It’s important to note that this survey was conducted prior to the referendum and shows that SMEs were consolidating their recovery, with demand in the private sector continuing to pick up. If this wavers, as suggested by recent ONS stats showing that the construction sector is now in recession, then the government must do everything in its power to reverse this situation and get Britain building again. Our survey shows that despite an improving overall picture prior to the referendum, public sector workloads for smaller firms continued to decline – a trend that has gone on for too many years. A significant programme of publicly-funded capital investment in crucial areas such as housing and infrastructure, along with a renewed focus on improving public procurement processes for SMEs so that they can benefit from these opportunities, would be enough to hush any whispers of a post-referendum recession.”