Green light for Carney? Why construction industry may need stimulus

Monetary stimulus may be needed to prevent a slump in U.K. construction following the Brexit vote, a senior executive at a major engineering firm has warned.

Construction is one of the U.K.'s major industries, contributing around 6 percent in gross value added terms to the economy, according to PwC.

The first data out after the vote to leave the European Union on June 23 suggest real estate and construction activity is already falling. The Markit/CIPS Construction PMI for June, published this month, showed a fall in residential building and a decline in commercial work for the first time in over three years. Twenty percent of respondents replied to the survey after the referendum result was known.

Crossrail in London is Europe's biggest infrastructure project.
Peter Macdiarmid/Getty Images

"This (weak data) does point to the idea that … there may need to be some monetary stimulus," Mark Cleverly, commercial director at Arcadis, said at a debate hosted with the Royal Institute of British Architects in London on Tuesday.

The Bank of England surprised financial markets by keeping interest rates on hold last week, rather than making a stimulatory 25-basis point cut to the base rate. A rate cut or even a resurrection of the central bank's massive asset-purchasing program is still seen as a possibility after the Bank of England's August meeting, when Governor Carney and his colleagues will mull updated growth and inflation forecasts.

"The real worry for us is that we might get into a zombie economy, with delays in (construction) projects, which lead to a lack of visible pipeline for the future, which lead to cutting investment… may be having to chase work by bidding more competitively for lower prices," Cleverly said on Tuesday.

In its U.K. economic outlook for July, PwC forecast construction would be the sector hit hard hardest by Brexit, due to its reliance on large-scale projects that might now be delayed or cancelled. It sees the sector shrinking by 0.7 percent in 2016 and 2.0 percent in 2017.

The pessimistic outlook found support at Tuesday's debate.

"In the last year, judging by the cranes we are seeing across the city (of London), there has been a lot of construction (projects), but many of them will cease to be completed," Nigel Coates, a London architect and panelist at the event, said.

"We are obviously in a situation of turmoil," he later added.

Brexit and the commercial real estate market

Shares of U.K. house builders and real-estate investment trusts dropped sharply immediately after the referendum and trading was suspended in seven U.K. commercial property funds.

On Tuesday, Cleverly advocated fiscal stimulus and increased government expenditure to boost the construction industry, either as an alternative or in addition to action from Carney.

"There is an argument that we accentuated the crash in 2010 with the (government's) austerity budget," he said on Tuesday, adding "That kind of immediate withdrawal of money from the market is what worries me."

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