Impact of the Recession on Construction Contractors

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THE IMPACT OF THE GLOBAL FINANCIAL CRISIS ON THE CONSTRUCTION INDUSTRY JANUARY 2009

INTRODUCTION

The current crisis in the world’s financial system has left the construction industry facing its toughest challenges for a generation. Salaries are falling; job cuts are predicted to reach 400,000 in England alone; and the impacts look set to get much worse before they get better.

No country is immune from the impact of this and the UK, and much of the rest of the world, is already in, or about to enter a recession. Even buoyant construction markets such as the United Arab Emirates (UAE) are starting to feel the effect, with construction growth rate expected to slow from 20% to 15% in 2009 (Al Mal Capital). The United Nations (UN) predicts world economic output will shrink by as much as 0.4% in 2009 (UN's World Economic Situation and Prospects Report, 2009).

These are serious times, however, the industry needs to be prepared to contribute to the recovery by retraining workers, maintaining the highest of standards of quality and supporting innovation. Construction professionals must not lose sight of their commitment to issues of sustainability, health and safety, ethical business practices and improved building standards. These will future-proof the industry and allow it to grow after the economy recovers.

Companies seeking to find an extra edge in an increasingly competitive marketplace are likely to employ greater innovation as they look to become more efficient. This could have far reaching benefits for the industry in the future, where innovation has never been more vital.

IMPACTS AND CHALLENGES

Construction Output
It is clear that construction is in for a period of deflation. Forecasts suggest that there will be a 7% decline in output over the next three years, however, this figure is heavily contingent on Government spending coming through as planned (Construction Products Association).

In the second quarter of 2008 new order figures were at their lowest level since 2004; 14% below the average last year. Housing orders were down 30%, private industrial orders by 36% and commercial orders by more than £1bn from 2007 (Construction Products Association).

A rapid decline in private work has been partly propped up by more public sector spending, however the outlook for the private sector over the next few quarters is set to get worse. The Olympics will prop up the industry to a certain extent but the cessation of office development will have a much greater effect.

Overall, even if all public sector funding was spent next year, the construction industry in 2009 would still see the largest percentage of fall in output since the early nineties, when over 500,000 left the industry. This has been brought about by the sharp fall in private sector investment in construction – offices, retail, entertainment, as well as private house building.

Public Sector Spending
The Government’s decision to bring forward £3bn of capital spending on infrastructure was cautiously welcomed by the construction industry (Pre-budget statement, November 2008).

Given the extremely high levels of borrowing that the Treasury is expecting over the next few years, there is a risk that Government will fund later debt repayments with cuts in capital spending on construction further down the track.

There is also a risk that delays in the Government’s existing build programmes will lead to increased under-spend. Programmes such as the Building Schools for the Future Programme have already fallen behind schedule, and reports suggest that this is as a result of bureaucracy rather than lack of funding.

Business Finance and Loss of Confidence
According to the Confederation of British Industry (CBI), more than half of British firms have seen a decline in the ease of access to capital since the onset of the credit crunch; 30% of businesses have been, or expect to be refused new credit; and 78% expect business conditions to be...
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