Factors that affect Performance of Firms in UK Construction Industry

The economic performance of a UK Construction PLC will be affected by many factors, including the role of government, exchange rates and inflation. Discuss

The construction industry tends to be a quite volatile sector of the economy. Investment spending in construction has a strong correlation to the rate of economic growth and future prospects. When growth is high, demand for construction will be rising, when growth rates fall and the economy heads toward recession, firms invariably cut back on new construction projects and the industry can be hard hit by a slow down.

The exchange rate has a bearing on the exporting sector. If there is a depreciation in the exchange rate, exports become more competitive and the exporting sector will generally do better. This can lead to increased investment by industry.

However, a lower exchange rate tends to be only a short term boost and demand for UK exports is increasingly inelastic, meaning a depreciation doesn’t help much.

Higher rates of inflation tend to discourage investment. Firms have uncertainty about future prices and costs and there is a general economic uncertainty. Also high inflation rates are usually a sign that interest rates will have to rise, something that may discourage investment because higher interest rates increase the cost of borrowing. Since construction is often financed by borrowing or using savings, the interest rates will be an important determinant of investment. A period of high interest rates will make life difficult for the construction industry.

Housing Market A significant sector of the construction industry is the housing sector. Again, the housing market tends to be quite volatile. The recent slowdown in house prices and prospects for lower prices means that many homebuilding firms such as Bovis are cutting back on their plans for building new houses. Also as house prices fall, the return on building new houses decreases.

Government Policy. Government policy can play a role in influencing the construction industry. For example, tax relief on investment projects may encourage firms to invest. Higher minimum wages and legislation to protect workers, may increase the cost of business and reduce profitability.

Raw Material Prices. Higher raw material prices such as steel and oil will increase the cost of business. If the economy is growing, they may be able to easily pass these cost increases onto consumers. However, if the economy is slowing down then it may be difficult to pass on costs leading to lower profitability