Trumped by volatility

The construction picture has not exactly been stable for some years and since the pandemic it is fair to say that the industry has endured fluctuating fortunes.

The advent of a new government in the UK over 12 months ago was supposed to herald in a period of growth epitomised by the “build, build and build a bit more” policies introduced pretty much from day one.

However, the new government here possibly did not envisage the large orange cloud that was going to form across the Atlantic by the end of 2024 that quickly ushered in an even more uncertain and unpredictable period in global politics.

The return of President Trump to the White House and a much more radical new version of his MAGA crusade immediately had an impact around the world.

A rhetorical avalanche

There has been no easing off in terms of the rhetoric or the avalanche of policies, indeed the most recent survey shows that global supply chain activity fell again in July as US manufacturers sharply tapered purchases of materials and components after building inventories in June ahead of the end of the ‘tariff pause’.

That is according to the GEP Global Supply Chain Volatility Index, a leading indicator tracking demand conditions, shortages, transportation costs, inventories, and backlogs based on a monthly survey of 27,000 businesses.

“When we remove companies’ front-loading inventories and rerouting goods to avoid tariffs, the underlying picture points to slowing manufacturing demand worldwide,” said John Piatek, Vice President, Consulting, GEP. “The July data shows a clear pullback in orders, with U.S. manufacturers preparing for lower demand going forward.”

There was an immediate impact to the Trumpian battle cries, some of it positive - the trade organisation representing British manufacturers has seen a surge in membership applications in the last month, as interest in ‘buying British’ grows.

In the month following the introduction of new tariffs on imported goods into America, the internationally recognised trademark, Made in Britain, saw a 20% increase in the number of companies applying to join the organisation.

Made in Britain CEO, John Pearce said: “Since the tariffs, more businesses are focused on British manufacturing representation and promotion so we have seen a real upswing in the number of UK manufacturers reaching out to us to register as members of Made in Britain. There’s a clear correlation with the introduction of America’s sweeping trade tariffs, with businesses eager to celebrate and showcase their British-made products.

“If there is one positive outcome of all of these trade tariffs, it’s that consumers, retailers and manufacturers are recognising the value of British-made products and that’s exactly what we, as an organisation, want to encourage.”

Collaboration on risk

But, generally speaking, the impact has been more negative.

DLA Piper says that in response to recent geopolitical events and economic volatility, including the imposition of new tariffs, there have been notable changes in risk allocation in UK construction contracts.

“The imposition of tariffs has introduced new challenges for the UK construction sector,” said the firm’s Legal Director Clare Rushton. “By understanding the allocation of risks in standard form contracts and leveraging available relief mechanisms, stakeholders can better navigate these complexities.

“Recent trends indicate a shift towards more flexible and collaborative approaches to risk management, ensuring that projects can proceed smoothly despite economic uncertainties.”

It’s still early days to understand the long-term economic impact of tariff turmoil, but the latest insight from the Organisation for Economic Co-operation and Development (OECD) points to a less-than-positive outlook for the UK.

Not a rosy picture

Given construction’s inextricable link with wider economic health, these forecasts bring little comfort. Already, trade strife has been reflected in demand and output insights to some extent.

And given the global importance of the US to the world economy, any change in its economic policy can have global repercussions.

However, all is not rosy in the States. It runs a large trade deficit. There are some who maintain construction can weather this storm too.

Adrian Malleson, RIBA Head of Economic Research and Analysis, said: “The manufacture and supply of construction products are less globalised than many other categories of goods.

“To be simplistic, buildings are mostly - but not exclusively - made of big, heavy things. Those big heavy things - such as concrete, bricks, and cement - are expensive to move. It's more efficient to source construction products locally wherever possible unless they are high value and specialised. That said, trade in steel, aluminium, and timber are more global.

“Trade in construction products between the UK and the US is relatively small. The ‘US customary’, rather than metric, system of measurements also adds friction to the construction product trade.

“Around three-quarters of UK construction products are sourced locally. Most imports come from the EU, with whom we run a trade deficit. The bulk of US construction products come from within the US or from neighbouring countries.

“The immediate effects of tariffs on the availability of most construction products in the UK should not be pronounced. The increased costs of exporting to the US may, however, lead those who operate internationally to turn to the EU and UK markets, so growing supply and suppressing prices. This may alleviate cost pressures on construction projects.”

But, he added, a weakened UK economy will lead to a weakened construction sector. “Rising uncertainty may inhibit the long-term capital investment necessary for construction projects,” he said. “Falling consumer confidence and diminishing investment values may subdue the domestic sector.”

Some sunny upsides

There are some upside scenarios. Those who once exported to the US, now facing tariffs, may seek other markets, including the UK, so easing inflationary pressures.

This, combined with the need to stimulate a faltering economy, may lead to interest rates falling faster than expected.

“High interest rates have worked against the construction sector for several years now,” he added. “A faster-than-anticipated fall would help stimulate investment in buildings.

“Further, as investors take flight from stock markets, government bonds are becoming increasingly attractive. Governments can offer a lower rate of return, so the interest, or yield, governments pay on their debt will fall, freeing up money for other things – including capital investment in the UK’s long neglected public estate.”

So where next for construction?

The only person that can accurately predict the next big MAGA moves out of the White House is the President, but it would be advisable not to hold your breath as you wait for that to happen.

Paul Groves is Group Editor for Specification