Current Financial Downturn and its Impact in Construction Industry
The credit crunch and fall down of the US sub-prime money market as well as recession has been seriously injured the UK economy. The UK construction industry has been has been distressed with impulse of credit crunch coupled with write-downs on investments for wide-ranging borrowing costs as well as increasing figures of borrowers botched to repayments. Most of the well known buy-to-let lender of UK has been suffering in the course recession. Consequently the construction market has distressed by continue fall of house prices which is lowest of the long history. The prompt way out to bring stability of the construction market and measures to returning to market activity turned at a lowest level. This structured paper would look for the detailed financial downturn in UK and its wide ranging shock on the construction industry.
Aims and Objectives
The purpose of this paper is to analyse the course of present recessionary economy of UK and it to finding the financial downturn in UK construction industry. This report also look for the wide ranging impact on construction market and finding the most effective recommendation to face the challenges of world recession for UK construction industry.
This paper has been organised with the secondary data collection methods as well as the data analysis techniques applied within this project are most recent. Media news, Articles and researches used to prepare this paper are not later then 2008, though the experiences facing previous recessionary paradigm has been reflected in action. The well thought-out themes of recognised economists and authors have been carried out the analysis and recommendation.
Analysis and Discussion
Recessionary Economy of UK
CNN (2008) has been broadcasted that the finance minister of UK has seriously warned that Britain is now passing the worst financial situation for sixty years, moreover the present crisis will be more profound as well as long-lasting than estimated. According to the report of the UK’s Press Association His statement become true at the time when the policy-maker of Bank of England supported his statement arguing that more than 2 million people will be unemployed within the end of 2008 and it become true practically. Labour party is also facing serious trouble because they had several commitments to the people and British PM Gordon Brown added that they have to face hard job persuading the voters in order to ensure another term in office. To fulfill their commitment and to reach peoples expectation to Labour party, they have to revive that zeal which influence to won 3 elections.
As a result government considered the year 2009 is the most difficult period for the UK citizen and government has planed how they can overcome this crisis-period. In 1930’s great depression Lord Keynes acknowledged that governments ought to enhance spending and reduce taxes to make better their economies. Though the most other encomiast of that time believed that the market economy automatically would get better on its own effort devoid of government action. Now the government ought to follow a new way to overcome this greatest crisis and UK Prime Minister expressed his deep concern on financial downturn recovery plan.
Impact on Housing Price
From December 2008, the prices of houses in UK have been reduced from 2.2% to 16.2% in average and it is expected that this price will also reduce 15% in 2009. After scrutinizing the data (entire records of 1983-2008) Halifax mentioned that it was the largest annual turn down for ever because prices of the houses are more reasonable but receiving mortgage is become difficult for people. The Bank of England demonstrated that a large number of mortgage sanctions cut down to 27,000 in November 2008 which was the lowest in last nine years and when a mortgage has approved, it is not lent for recession.
This data provides warning to the bank regards the issue of housing downturn and it is also enhance pressure upon the commercial banks to initiate to amplify lending stages. Bank takes few initiatives by checking their own credit condition such as they argued commercial-banks as well as building-societies designed to carry on to restrain on lending to persons & businesses, in mortgages & other-loans issues. It is predictable that ongoing stress on earnings & the negative effect of the displacement of the financial-markets on the accessibility of mortgage may cause of future downward.
The general norms of housing market disturbed within its business activity, financing, job opportunities and consumer spending in the housing market. Housing price continuously decreasing and not yet gets any stability to recurring the market activity
The data of ONS1 has demonstrated that by September to November 2008 the number of unemployment in UK has increased from 0.131 million to 1.92 million. It has evidenced that the organisational measures of redundancy that the people looking for job but not getting redundancy benefit has reached 1.923 million. The number of redundancy established an overflow of unemployment as banks cut downed credit lines and cost-saving measures followed by the firms. Economists, Bankers and corporate experts have warned that the grown up unemployment is extremely dreadful. Here the terrific risks of the labour market loosening are increasing very swiftly. Companies are enforced to axe further jobs in grounding for to sustain from the recessionary trouble and turmoil and save their business.
In December 2008 the speedy deterioration of public finance has been evidenced at most terrible level of World War-II. ONS has demonstrated that the governmental borrowing was US$ 20.5 billion in November 2008 when the aggregate borrowing of the financial year amounted US$ 97 billion which is two times above of the previous fiscal year. This level of governmental borrowing touches the worst situation of 1946. To sustain the economy government would like to use the economic tools such tax cut and additional pubic spending and planned to increase public borrowing for an amount of US$ 165 billion in 2009.
Collapse of Corporate Bodies
The collapse UK’s largest mortgage lender Bradford & Bingley, and investment bank Lehman Brothers by the hit of credit crush in Europe overwhelming a new chapter of the credit crunch conveying the circuit of global banking sector and effectively fastening the economic fate of the sector.
The Bank of England has practiced its traditional tools to control inflation such as interest cut and tends to zero. The Bank is adamant to remain the inflation spirit under full control and to keep away from the situation of 1970. But the continuous cut of interest rate has been reducing the base rate at 315 years lowest of the history.
The rates of company collapse are also increase rapidly with renowned brands like MFI and Woolworths along with dozens of firms already have been thrown under the administration by November and December 2008.
The inflation has been turning faster into dilemma of the looming recession and derived into the way to a pointed turn down in demand as well as economic motion worldwide. Growing joblessness has turned increased redundancy at the highest of this decade. Bank of England extended its cooperation by cutting the interest rate and continued the effort until it touches rampant levels of inflation of previous year. Inflation rocked the CPI 2 at 5.2% with is more than double of the governmental expectation at the level of 2% prolonging with the raising food and oil price.
Background of the Construction Industry
The constructor of United Kingdom construction industry has suffered loses due to reducing the global demand as a result all movement cut down in all 3 sub-areas of this industry at the highest pace on record for example, in December 2008, housing has undergone the sharpest turn down, whilst both civil-engineering as well as commercial-construction cut down at record rates. The continuing decline in the index represented “corporations’ concerns that the continuing financial crisis demonstrates diminutive symbol of relenting.
This industry has accomplished a new landmark, constricting at its highest rate in above a decade. The current data demonstrate that this construction industry is worth 6% of the states financial system. CIPS3 construction index cut down through for the 10th consecutive-month in December 2008 by two-points to 29.30 points which its lowest stage from the chain started in 1997. At this time, speculation is rising so as to the Bank of England will respond through advance cutting the interest-rate to 1.5 percent, a significant low.
After analyzing the situation of interest-rates which fluctuated for cutting 2.5% points in November and December 2008 decreased official-rates to a bellow 2%, the Bank’s rate-setting MPC4 is balanced in order to take more fundamental activities. Nowadays CIPS investigation is also discovered sharp falls in latest business and entire action prompting payroll cuts as well as the aggravating the risk of more joblessness in the limping industry.
The deterioration condition of the construction-industry will include more pressure for the Bank of England’s MPC in order to cut the interest-rates by 3% points to 2 % in its previous 3 meetings as well as it is anticipated to incise by as a minimum 50 basis points this moment around. If this rate is slash to 1.5%, it would be the highest stage of cut down since 1694.
For the ongoing downturn it becomes inevitable that in the construction industry workers are lose their employment and it fails to generate additional employment opportunity. However, in current month these rates of lose their employment is faintly slower speed comparing to the last month.
Economist’s of UK argued that the quick retrenchment in whole industrial action, collective with the common obscurity pervading throughout the financial system, concluded in considering both the negative view for the segment over the next year & another substantial ground is job-shedding. Builders reacted to the record turn down in action through cutting-back on their input-buying at the quickest rate from the time when the survey started.
Input-price deflation sustained from October 2008, however, now the price fall is lower than the previous months. It has great impact on the construction industry for instance lesser input-costs are generally attributed to decrease the costs of raw-material, with steel mainly singled-out. The unavoidable impact of the recessionary economy has evidenced the commercial prospect of the construction sector has to be thrown within the negative axis and even serious hit on the further new initiatives and business activity by lacking confidence at entrepreneur level.
CNN News (2008) has quoted Alistair Darling the finance minister of UK and added that the country has been passing through the most terrible economic crisis among the past 60 years which would be more deep and long-lasting. CNN also added The Bank of England notified that the unemployment may perhaps punch two million by December 2008. Quoting Prime Minister Gordon Brown it also warned that to worked out the economic revitalisation and implementation plan would take at least two years to overcome the downturn of construction industry of UK.
Analysis of Construction Industry
The credit crush has seriously impacted the construction industry of UK. Construction sector has an 8% contribution in the GDP of UK with 250,000 companies employing almost two million working force. The poor performance of construction industry has set to modify as it squeeze technology to decrease onsite problems as well as cost and time.
Recessionary impact on the UK construction industry has down turned the overall performance. Though the official alarming of recession signified a long lasting impact, but the UK construction industry hopefully turned into its own track before London Olympics -2012. Mobilisation of recourses for London Olympics and civil engineering works to organising Olympics should capitalise in a gigantic way.
To ensure mobility among the construction industry £ 40 billion private project was initiated in last year as an integral part of public commitment of the acting government. The experts opinioned that the construction industry has been laid at least 10 years backward from the mainstream commerce due to highly dense workers of the industry and the itinerant temperament of the jobs it performs. Integration of IT strategies is also not wide wrapping except very a few big players of the industry.
The construction industry edges more rapidly by 2012 Olympics would generate a large number of infrastructure projects in London and around the city. A mounting number of executives of other industries like IT professionals would be enter in the construction industry leaving their current sectors. These types of marches would enrich the industry by its contribution to the national economy. Such instance already started by Oracle acquisition of JD Edwards and People soft. This merger has doubled the figure of clients of the Oracle construction and turned it into the UK Construction 100 list. The Balfour Beatty and Costain possibly would follow the instance of Oracle.
The rejuvenation and construction of key sites for the 2012 Olympics could also generate an extra 150,000 jobs within the construction industry. As a result it should deliver the integration of IT designed for enhanced efficiency turn into the norm between the major players. This explosion within the construction industry has already been started. The top three players of the construction industry Balfour Beatty, Carillion and Costain have issued their annual report 2008 with almost similar optimistic views. Especially Balfour Beatty (2008) has issued its annual report with a 16% gain then the previous year.
Though it has pointed out some recessionary risks, but there is no downturn in its earnings. Balfour Beatty (2008) only pointed the recessionary economy would impact on the Group’s customers and supply chain. These also influence the external environment together with local legislation, customer risks, strategic risks of tendering, Merger & acquisitions, investments, management, organisational risks as well as IT, HRM risks, asset & service delivery risk, supply chain risk, operational risks on all sides of a and environmental, health and safety risks.
Organising Recommendation for Construction Industry
Officially UK has sink into the vicious circle of recession in the current months and the financial crisis goes up in the fold of the distressing credit crunch. The presser of credit markets strike starting from 2007 droved the lending deficiency has affected the banking, households and businesses of UK by descending economic outputs.
Underneath the present recessionary economy the issues of construction industry’s risk management has been called attention to more widely both in UK and rest of the humanity. The corporate world is in serious hazard to keep upheld corporate governance along with internal control. If the internal controls stop working, the prospect to sustain by utilising bailout should be ruined. In this context Turnbull Report can play a vital role as it is mainly concerned with internal control and effectual on behalf of corporate risk management. In mid-September 2008, the UK’s prevalent mortgage lender Bradford & Bingley has been collapsed by the punch of credit crush in Europe. The UK government proclaimed to nationalising B&B and finance £ 18 billion to salvage distressed Bradford & Bingley as a supporting part of US bailout.
Based on the present financial downturn action plan to recover the national economy is still under process. This paper would make recommendation for the construction industry which would be helpful for policymakers and corporate management to face the recessionary impact for the players of construction would be adopted –
- The wide-ranging idea of the present financial bail out bill is to pay for bad debts from the financially incompetent corporations to growing up solid capital as well as possibility for common lending actions aimed to the customers. Nevertheless, the resources to right of entry in such a bill has differentiated by a number of negative belongings and moral imperfection inside its previous and after completion in construction industry
- The consequential state of affairs is highly put on a pedestal by a huge scale of pillage next to the bankers. Such economic compress will be resulted in bargain of cost-cutting measure with massive fraud. The mass people are in doubt of fleeting the bail out bill act of getting additional money by some bureaucrats and their associates in the construction industry.
- Kochan, N. (2008) mentioned that it is already been deferred of such hazard since the state is seemed to set aside some of the selected firms as many institutions necessitate to help to carry on whilst they cannot sprint properly and had been confined with endowment complexity.
- The most significant moral corruption can be observed the major payment of the top executives of the billionaire bankrupted firms. Devine, M. (2008) pointed out that CEO of Lehman Brother’s Mr. Richard Fuld got $480 million. Simultaneously Waxman went on a $US 440,000 variety of counting $US 23,380 on health resort treatments in late September from American International Group. Fuld, R (62) was well-informed that his responsibility was to play as the “scoundrel” of Wall Street and did his best throughout his broadcast and he doesn’t expect himself to feel repentant. The negative belongings are just like in concert the flute while Rome burns.
- The condition of construction industry would be assumed to generate a serious inflation through the lending back of money at superior interest rates towards people.
- The major preplan negative effects of this policy can be experiential by increase in interest rates from 2006 that twisted sub prime depression where people tended of not payback their loans.
- Financial markets have to be gravely overcome the huge risks adopting propensity of larger investment firms and require of adequate control of the legislators by the last 70 years.
- Required to excessive conveniences in housing loan tended to make supplementary supply that demand which reduced the price of houses making people not entitled of paying the debt etc.
- Nevertheless, the state of affairs has to be reached in such conditions where the investment banks have stringently burnt their finger and in that case the authorities required to introduce theme of awful year’s familiarity through avoiding bad years and turn into conscious highly to preserve equity and loosing corruption.
- The construction industry has to emphasis for prevention in merger of investment and commercial banking has distorted the right allocation of capital and prepared it difficult for commercial banks to maintain deposit as liabilities as investment banking is the put money of all time.
- The construction industry at the present time has a tight policy of the interest rate with high inflation and financial volatility by the central banks. As a result of the current problem, banks believe mostly on wholesale funding that is affecting on capital negatively.
- Because of the imperfect valuation of risks in construction industry, many banks have not sufficient capital. As a result the numbers of investment banks are being insolvent. Consequently many investors have a propensity to invest in risk free government treasury bills as well as negative balance of mortgage, construction industry has been extreme shortage of liquidity and now such complexity has been spread out from the investment banks to mutual, hedge funds as well as commercial banks.
- As the bail-out proposal has implemented morally and cannot effort any positive impact on the construction industry, bank capital would raise at an optimistic level. On the other hand, uncertainty and political uncertainty would also affect a better capitalization of all banks.
- At the starting the majorities have been touching of this plan of concerning billion in debt and for that cause they voted. Another resistance came for the reason that the dilemma of credit crunched people. As this recommendation would seem as a fearsome step, the legislature should be obligatory to prevent the speculation involved in construction industry. Putting up of a number of structures regarding rule for protecting the investors is another possible way to overcome the downturn of construction industry
- Changing of debt based financial policy for autonomous form of manipulation to feed construction industry.
In case of systematic crisis of construction industry, it is essential for a recapitalization of construction sector to avoiding an exclusive and distractive reduction of debt while buying of noxious assets of the commercial and residential housing is merely unsuccessful process for the recapitalization of banking procedure should be urged.
Moreover to overcome at the recessionary downturn at project of construction industry would be recommended as follows-
- Internal conflict: The first recommendation is efficient control of internal conflict among inter-administrative groups at project of construction industry.
- Taking a huge amount of remuneration: It has been required to impose restriction on taking huge amount of remuneration by the executives
- Corruption made by top level executive: The strict check up or monitoring where any chance to create any corruption or fradulary activity occurred by senior executives.
- Internal control system: The construction industry should adopt fruitful internal control system and thus the company could control internal conflict and also manage risks efficiently.
- Ineffective revise system: – Construction industry should system develops product quality system as a result product could be developed and revise whether required.
- Internal audit system: – The construction industry would create transparency in internal audit scheme. This would be reduced corruption of the organization at project level.
- Fail to manage risks: – The risks management of construction industry should be tactful rather than undiplomatic.
- Inappropriate risk response strategy: – The construction industry’s strategy of risk management would be appropriate for performance evaluation, reducing costs as well as maintain target time frame.
The recent political economy of UK faced to USA. For a real progression the country required to reduce its dependency and integrity with USA at the same time it is urged to more emphasis on euro zone as well as extend the economic cooperation with Asian prospective countries avoiding all warier and aggressive trends and back from Iraq. The macroeconomic condition of UK has lingered within a controllable position to over come the budget deficit by way of the tools of fiscal and external accounts measures intended for medium term. The present unpredictability of falling oil price, account surplus, overseas asset situation would argue this report to suggest pursuing a precautious fiscal policy for UK.
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