The UK’s impending exit from the EU is likely to be an epochal moment. Depending on the form of the exit, the impact of Brexit on the construction industry could be minor, or there could be very severe economic consequences.
Assessing the different outcomes of Brexit
Considering the major impacts of a non-disruptive Brexit and a disruptive Brexit on firms in the construction and manufacturing sectors. Looking at both the short-run and long-run impacts under non-disruptive and disruptive Brexit scenarios. These include greater shortages of skilled and unskilled labour. Both permanent and contracted, worsening the labour shortages already being experienced in the construction sector. Other issues impacting the construction sector include additional costs of importing goods, raw materials and components.
A globalised economy has resulted in the adoption of “just in time” production processes. Where firms have not been required to hold large volumes of goods or materials in the case of supply-side shocks. The retrenchment of what many assumed to be a foundational principle of the modern economy has resulted, over the last 12 months, of bulk purchasing and stockpiling. Materials stored in car parks and mass manufacture using up perishable production inputs.
The graph below shows the potential impact on GDP of a ‘deal’ and ‘no deal’. The Bank of England defines four scenarios within the deal or no deal outcomes. A deal could be both ‘close’ and ‘less close’ and a no deal could be either ‘disruptive’ or ‘disorderly’:
Under the two potential scenarios of a ‘deal’ and ‘no deal’, the impact varies greatly. Under a Brexit deal, the UK economy is forecast to continue to grow. At albeit a slow pace, and no major shocks or deviations to the economy are anticipated. While trade will be impacted leading to some minor shortages of imported goods and border delays, they will not have materially negative effects. It is important to note that a major part of the assumptions around a Brexit deal is that the UK retains access to existing EU deals with non-EU countries in a transition period. Under a no-deal Brexit, the Bank of England expects a recession spread over the next three quarters.
Mitigating the Brexit risk
It should be noted that there is only so much within management control. Companies will need to be flexible and be able to react to events and resilient in the face of potential shocks depending on.
• how bad the initial impact of a no-deal Brexit is, with border delays, tariff imposition and shortages of goods, and
• how significant the subsequent impacts are in terms of a wider economic downturn.
In summary
As the deal agreed between the EU and the UK in principle winds its way through the remaining legislative and parliamentary hurdles, the detail remains vague at this stage. It should become clearer as details of the agreement emerge over the next few days. It remains relevant, however, to understand and assess the different possible scenarios and the likely impacts on companies in the construction and manufacturing sectors.
Find out more in the AMA Research Brexit report – Overcoming uncertainty
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