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Published in Construction on 29/06/2016

Brexit – what it means for Ireland’s Construction Industry


CNI reports

The only certain outcome from the results of the Brexit referendum is total uncertainty in the medium term for both the UK and world economies.

The outcome of the vote in the British Referendum on membership of the European Union last week took many around the world by surprise, and the prospect that the British public would not choose to ‘Remain’ once they stepped into the voting booth seemed unthinkable to many commentators.

The unthinkable was realised however and as the results poured in from around the UK on polling night, a picture emerged of a country divided along economic lines and one which is far angrier than many had believed possible. Britain has long had a large proportion of Euro-sceptic voters and politicians, but this was something different.

Looking at maps that illustrate voting trends, the divisions could not be more apparent. Scotland, Northern Ireland and the greater London area, along with some other relatively well off pockets of the UK voted by significant margins to remain in the EU, while large swathes of the North of England and almost all of Wales, areas which have felt the brunt of 30 years of economic decline, voted to Leave.

It’s probably unsurprising that the communities most likely to vote in favour of leaving are the most deprived.   Any time that successive Conservative governments imposed austerity on those communities over the past 40 years it has blamed the European Union, a message which has been stoked by influential sections of the media and by populist right-wing parties.

The immediate effect on the economies of the UK and Europe has been significant – in just a few days the pound has fallen to its lowest level against the US dollar in 35 years and billions have been wiped off the stock market worldwide.

What is certain at this point is that the UK is set for a sustained period political and economic  uncertainty, at a level not seen since the 1970’s, and at this point it is hard to envision exactly how the current crisis is to be resolved. The only certainty is increased and sustained uncertainty for the immediate future.

Political fallout

As far as the two main parties in UK politics are concerned, there are no winners as a result of this vote and the results of this referendum have split both the Conservative and Labour parties.

Both parties are in disarray, with Prime Minister and Conservative party leader David Cameron resigning in the aftermath of the referendum result, while Labour party leader Jeremy Corbyn lost the confidence of 80 per cent of his parliamentary party despite being overwhelmingly endorsed by the majority of the membership less than a year ago.

It looks increasingly like both parties are set for leadership contests over the coming months, and the sense among political journalists is that there will be a general election in the coming months as well.

The situation in the UK is muddied further by the fact that the EU, desperate to contain economic and political contagion, are pressing the UK to invoke Article 50 of the Lisbon Treaty (which lays out how a country may withdraw from the EU) immediately, while caretaker Prime Minister David Cameron is insisting that there is no rush.

Most UK politicians, even those who lobbied for a leave vote, are keen not to begin the process without having some idea of what invoking Article 50 will mean – something that should have been considered before a referendum was promised – and without preliminary talks with the EU.

There is a hope within some sections of British politics that this would open the door to returning to the electorate, of which many seem to now have a serious case of buyer’s remorse, for a second referendum. It’s a scenario that we may be familiar with in Ireland, but a sequel to the Brexit referendum would be unprecedented in the UK.

The likelihood of the EU agreeing to open negotiations ahead of receiving notification under Article 50 does not look likely however. The prospect of emboldening anti-EU parties in the other major member economies means that the EU must take a hard line with the UK, and the fear is that the uncertainty that this result has brought about will kill off a tentative economic recovery in the block.

The Irish Economic Outlook

So what does all of this mean for the Irish economy as a whole and the construction sector in particular? As was speculated in an entirely different context a century ago, is England’s difficulty Ireland’s opportunity?

Broadly speaking the result from the UK is an incredibly damaging one for Ireland’s economy and the construction industry in particular. There is absolutely no way in which Ireland cannot be affected by such instability in its largest trading partner, or instability from the wider world and European economies.

While Ireland has done a good job of diversifying the markets it trades with, in no small part due to access to larger markets via the EU, the UK is still our single largest single trading partner. Even with exports to the US, EU and BRIC markets taken into account the UK is our most important trading partner, with whom Ireland trades €1 billion in goods and services per week.

The dependence of the agricultural and tourism industries on the UK are well documented – given the weakening of the pound agricultural trade with and tourism from the UK market is likely to fall.

Both these industries were expected to make significant infrastructure investments over the coming years to respond to a growing economy and those must now be considered to be under threat. There are going to be many such indirect knock on effects to the construction industry to come to light over the coming months.

Direct hits

The direct effect of Brexit on the construction industry is going to be pronounced as well. According to the IDA and Enterprise Ireland both the construction and engineering industries have strong exposure to the UK market, much of which is not immediately appreciated by the wider public.

Figures released by the Department of Foreign Affairs show that as of last year 55 per cent of Irish exports in the construction and timber sectors goes to the UK each year. They also show that almost half of Irish clean energy technology is exported to Britain and Northern ireland.

The fall in value of Sterling against the Euro alone could seriously affect the viability of those exports, but when the effects on UK spending are taken into account the picture becomes stark.

Spending by the EU on infrastructure in some of the poorest areas of the UK, many of whom voted to “Leave”  in a spectacular act of self harm, will dry up quickly meaning fewer projects to tender on.

Replacing that spending with money from the UK exchequer, which was a central tenet of the “Leave” campaign, is unlikely to happen in the immediate tense.

The £350 million for instance, which it was erroneously claimed the UK sent to Brussell’s each week and was to be redirected to the NHS, has now been acknowledged as a fiction. Many more such promises are likely to follow suit.

The reaction from the markets has also led all of the ratings agencies to cut their ratings of UK government debt, and with good cause. The result is that it will be harder for the UK government to borrow, and even then at a higher rate than before this vote.

The result is that any money saved by the UK exchequer in contributions to the EU is likely to be swallowed up by an increased spending on a permanent basis on an enlarged civil service, necessary due to the transfer of functions carried out by the EU on behalf of the UK, and higher borrowing costs for the short to immediate term.

While there is still a slim possibility that parliament votes down what is a non-binding referendum, or that whoever succeeds David Cameron as Prime Minister (following the leadership contests in the Conservative and Labour parties) uses a likely general election as justification for a second referendum, there is going to be economic uncertainty for the next 6 months at a bare minimum and more likely for the next 24 months.

One of the major complicating factors should the UK eventually leave the European Union is the border between Northern Ireland and the Republic – while a weakened sterling is not great for Irish businesses wishing to win contracts north of the border, the imposition of a hard border would be disastrous economically for the economy as a whole.

Possible upsides for Irish Construction?

There are some possible upsides for the Irish Construction industry in the foreseeable future however. There is likely to be an increase in available talent for companies to utilise over the coming months, as construction slows down in the UK and skilled workers who are mobile are likely to consider Ireland as a more favourable host nation, both economically and socially.

The industry has suffered significantly over the past 24-36 months due to a lack o-f skilled and experienced workers at anything approaching the  rate required. If this can be addressed by increased numbers of skilled migrant workers, many of whom face an uncertain and often hostile environment in the UK at present, then prices can be kept down and hopefully making building more viable for developers and customers alike.

The second possible good outcome for the industry is the potential for increased big office projects. If the IDA manage to attract a significant proportion of Financial Services Businesses to Ireland from the UK, then there will be significant impact on the market for high end office space and a knock on effect on housing.

If companies do consider relocating to Dublin instead of Frankfurt, then major banks and financial institutions will be vying with tech companies for high-end office space that is already in dangerously short supply.

A combination of government investment in this sort of office space, along with fast-tracking investment in residential properties, is the only way to secure significant jobs and tax revenues from companies who are now likely to consider moving out of the City of London.

The Rumsfeld Conundrum

In the week following the vote in favour of the UK leaving the European Union, the probable downsides for the European and world economy are becoming more clear.

While the situation may throw up opportunities for the construction industry in Ireland if the scenario plays out as it seems it will, those are less obvious and also less tangible.

It is a situation with more ‘unknown unknowns’ than any politician on the “Leave” side was willing to admit during the debate and which are only going to become apparent in the weeks and months ahead. We are, it seems, unfortunate enough to live in interesting times.