brexit and the outlook for construction. w3 an... · brexit and the outlook for construction...
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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
4Document 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.
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
5Document 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.
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
6Document Classification: KPMG Public
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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
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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
8Document Classification: KPMG Public
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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 (%)
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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
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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
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& 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…
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Raw materials cost has risen 12% as sterling has weakened
Source: ONS
Manufacturing input prices
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Leading to a 2% increase in output prices
Source: ONS
Manufacturing output prices
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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
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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
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Funded by a fall in savings
Source: ONS
Household savings ratio(savings as a percentage of household disposable income)
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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
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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
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Commercial is already the weakest construction segment
Source: IHS Markit / CIPS
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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
25Document Classification: KPMG Public
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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
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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
27Document Classification: KPMG Public
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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
29Document Classification: KPMG Public
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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
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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
31Document Classification: KPMG Public
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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)
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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)
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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)
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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
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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
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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
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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