Brexit - what's next?

Following the landmark Brexit referendum, we are facing a period of uncertainty for the construction industry, which is likely to have significant impacts.

Brexit dominated international media in 2016, following the surprising result of June’s referendum. While an economic nosedive was predicted, and the pound took a severe blow from which it is still recovering, the reality has not yet been as earthshattering as anticipated. However, with the pivotal negotiation process just getting underway, the uncertainty and difficult decisions are only beginning.

The likely outcome

As a clearer picture of the deal being sought by the UK emerges, it is widely accepted that with the complexities involved, the likelihood of an agreement being reached by summer 2019 is slim.

The British Prime Minister has been vocal about the need for a ‘unique’ solution, but 20 of the 27 member states, representing 65 percent of the EU population, would have to vote in favor of this. The UK will leave the single market as it leaves the EU, meaning an exit from the Customs Union and an end to the free movement of goods, services, people and capital. It will seek bespoke and comprehensive customs union and free trade agreements, giving the greatest possible access. Whether or not this is achievable remains to be seen, but the UK is standing over its stance that “no deal for Britain is better than a bad deal”.

The outcome of the Brexit negotiations will pose considerable implications for Ireland, in particular. Maintaining the common travel area between north and south is one of the UK’s core 12 objectives, but some form of a physical border is inevitable, with checking of goods and documentation as vehicles travel across. It is hoped that this will be a customs rather than a security border, and will be as “frictionless” as possible.

Furthermore, the UK and Ireland have historically been allies within the EU, with closely aligned interests, but Brexit marks the loss of this ally and more powerful negotiator. A softer Brexit would have been preferable and involved less risk for Ireland. Irish businesses face a period of uncertainty, with a heavy reliance on the UK market – 37 percent of Irish exports go to the UK, valued at €7.5 billion, and potential tariffs, as well as logistical complexities (customs checks, bureaucracy etc.), could have devastating impacts. Business interest groups continue to raise questions about future trading relationships, business supply chains and access to the market, with Danny McCoy of IBEC asserting that “Ireland is uniquely exposed to the risks given our deep economic ties with the UK."

The pound's decline is driving price pressures higher, and being reflected in like-for-like increases on imported construction materials.

The anticipated impact on construction

Construction is expected to be one of the high impact sectors, with the movement of people, in particular, presenting a formidable challenge to the industry. In light of the prevalent skills shortage, and the implications of the end of the free movement of goods on imports and exports, there is considerable concern within the industry.

The currency volatility continues, with the pound having lost significant value against both the euro and the US dollar. Sterling is regularly dipping below €1.17, and has dropped roughly 15 percent against the dollar since referendum day. Its decline in the wake of Brexit is driving price pressures higher, which is reflected in like-for-like increases on imported construction materials. With large external envelope contractors and manufacturing sites that supply the UK are mainly based in continental Europe, so these increases are being reflected in recent tender costs.

Although a report by the Confederation of British Industry indicated that orders in the three months up until February grew at the highest rate in two years, the number of manufacturers who expect to have to change their prices over the coming months rose to its highest in nearly six years. However, it is expected that there will be a lag in higher prices translating to Consumer Price Index (CPI) inflation and that firms will be forced to absorb a proportion of the increased costs, due to heightened competition. The outlook from commentators is mixed, with some believing the devaluing has reached its worst, while others report that the worst is yet to come.

The impact of Brexit on the Irish construction industry is difficult to gauge, given the level of uncertainty about the outcome. Fluctuations in currency have the potential to impact on the competitiveness of companies trading with the UK, in particular those who export materials. The reaction of the industry in the UK will have a knock-on effect on companies who are active in, or targeting the UK market. On the other side, an increasing number of financial firms based in the UK, and London in particular, are proactively seeking space in Dublin to relocate a percentage of their staff, in order to continue to benefit from trading within the EU. This will help to drive both the fit-out and office construction market over the coming few years.