I’m not surprised that sterling has had a bad week. The Bank of England could not have properly measured the possible reaction of the market in the wake of their decision to take steps last week to bolster the economy while the current uncertainty remains. One of the reasons why sterling tumbled to a three-year low against the Euro on Friday was after official figures revealed that Britain’s construction sector has slipped back into recession for the first time in four years. The weak economic data led to expectations that the Bank of England will have to ease monetary policy again, causing the pound to slide further. Economists belief this could also be an early sign that the wider economy could enter a mild recession later this year,
Overall, the construction sector shrank by 0.07% in the three months to the end of June, following on from the 1.1% fall in the first quarter of the year. Output fell 1.4% compared with the same period of 2015. The figures from the Office for National Statistics looked at the period before the Brexit referendum on 23 June. Since that vote, economic confidence has taken a knock and house prices have shown some sign of easing. As a result economists believe the construction sector’s recession is likely to get worse.
‘The downturn looks set to deepen,’ said Samuel Tombs from Pantheon Economists, pointing to private sector surveys which show a fall in orders placed with construction companies. ‘Brexit negotiations will be protracted, so business will hold off committing to major capital expenditure for a long time to come. In addition, the public investment plans won’t be reviewed until the Autumn Statement at the end of the year and few construction projects are genuinely “shovel ready,”’ he said. ‘Accordingly, we think that a slump in construction activity will play a key role in pushing the overall economy into recession over the coming quarters.’
New work on building houses fell 1.1% on the quarter while new work on infrastructure dived 3.7%. Even work maintaining existing buildings fell by 0.5% in the quarter. The biggest fall in output over the past year came in government-backed housing construction, which crashed 6.5% compared with the second quarter of 2015. Private housing slid 0.2% while infrastructure fell 3.7% on the year.
One area of growth, however, was private industrial construction which grew by 7.3% on the year. One Public Sector construction firm, Scape, argued that the downturn meant the government should press ahead with big building projects. ‘The government must not lose sight of its commitment to the Northern Power House or the wider devolution agenda and ensure investment in vital projects there continues, as this will not only provide the area with the boost it needs, but also have a positive impact on the UK economy at a time when uncertainty continues to linger,’ said Scape’s chief executive, Mark Robinson.
Well, the future is not as rosy as some would make us believe – at least until we sort ourselves and restructure the fallout from Brexit. In the meantime, we must keep our seatbelts fastened for the bad economic weather is likely to batter us for a while and we must all be prepared for it.