A year of certain uncertainties

With the general election imminent, we’ll see many domestic decisions being put off until May. However, there’s plenty of unpredictability surrounding international markets to keep us all occupied.

This time of year the UK built environment is as engaged and energetic as a turkey that has survived Christmas. And predicting the future of the project managing, QS, contracting and design markets is a bit like forecasting the outcome of the Premier League. No matter how much I hope Southampton’s good form and the recovery will continue, I know that at the moment the future direction of our industry and my team is anyone’s guess.

Domestically, many decisions will be delayed until after the May election. However, the truth is that our fortunes are more governed by forces outside the control of the UK now. Energy is key here - last summer a barrel of Brent crude oil was $115, at the start of this month it was less than half that cost. In a perverse way this drop is good for growth, puts more money in the hands of consumers and cuts the costs for those needing to build, buy and rent.

The 15-year period that preceded the great recession of 2008-9 was built on cheap oil. However, a slight caveat may be the impact on other nations like Russia, Venezuela and Iran, whose economy is built on a $100+ price per barrel minimum. How they will react to a long-term drop in price is unnerving.

It also could affect the US where, according to Bank of England reports, oil and gas exploration firms could withdraw from making such heavy investment in the shale market due to falling oil prices. After all, these investors have underwritten the growth in shale exploration on the back of oil income. Less income from the core product - oil - could bring more risk for these investors in the short-term.

Step aside bankers and phone-hacking journalists – if we are not careful the next big bogeyman may well become Britain’s house builders.

But America in a wider sense has been emerging from recession and is also beginning to slowly understand the value of independent cost and programme management. Therefore as a market it is now potentially as exciting as it has been at any time over the past 10 years. If the economy continues to grow, it seems likely that the first interest rate rises are around the corner. This will shake up investors who may see construction and property as a good safe haven.

China now follows the US as arguably the biggest economy and is a major investor in UK infrastructure, energy and transport as well as being a key market in which to do business. If they buy, we build. In 2014, Beijing tried to bring borrowing under control, not wanting to suffer the same fate that befell the West in 2008. The new constraints on credit are starting to impact and the slowdown in 2015 will continue, in my view. However, it may also impact the UK positively, as the Chinese wish to diversify and learn our skills and grow their perceived immature overseas construction management and build offering. They seem keen to use investment as a shrewd “skills-for-money” swap.

Let us not forget the Eurozone, which is our biggest trading partner and therefore vital to the future of UK PLC. It should have emerged blinking into the sunlight of recovery by now, but it has simply not happened. With a growth of just 0.2% in the third quarter of 2014, deflation is now a real issue and as prices continue to fall, businesses delay spending plans as they expect prices to fall further. The perfect combination of weak growth, low oil prices and general lack of inflation means that for the first time the Eurozone may need to throw cash at the problem through a programme of quantitative easing. This may be the only thing to calm the fears of the markets.

Finally back in the UK: step aside bankers and phone-hacking journalists - if we are not careful the next big bogeymen may well become Britain’s house builders. I am starting to see national headlines that imply profligate and mercenary house builders are exploiting the UK housing shortage, the top 10 allegedly seeing profits climb to over £2bn last year, a 34% rise on 2013. This is linked to “the industry” apparently falling short of local government targets on affordable homes. Be aware, an election is around the corner and there needs to be a scapegoat found for the housing shortage. You just know the politicians are not going to incriminate themselves.

So like 2014 before it, 2015 is not going to be an easy or simplistic year for any of us. Perhaps we should accept, post-crash, that this lack of perceived predictability may be the new norm.

Richard Steer is Chairman of Gleeds Worldwide

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14.01.15

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