Introduction

The construction industry is very important to the UK’s, and indeed to the worlds, economy. In the UK, it accounts for more than 10% of the country’s Gross Domestic Product and employs and estimated 2.6 million people. In the last three years, an extra £33 billion has been made available to this sector to increase public services. Included in this figure are major investments in transport, health and housing. As the industry is investment driven, it is subject to the strictures of economic upturns and downturns, during the recessions of the mid 1980’s and the early 1990’s, there were significant downturns. However, in the late 1990’s, there was a marked swing in the opposite direction.

Everyone knows that downturn has hit the construction industry badly, with some sectors of the industry which have been affected more than others. Private housing, offices and industrial are badly affected by the deteriorating economics conditions and the credit crunch.

The situation is brighter for those with jobs in infrastructure and the Olympics, although neither of these will be enough to sustain industry activity.

Historically, economic conditions have led to a sharp fall in the flow of new projects in the pre-construction pipeline. Leading indicators suggest the outlook for 2009 may be worse with the UK officially having entered into a recession.

The government has had an ambitious construction-related spending programme across a number of sectors. Education and health in particular will benefit from an increase in the value of construction projects this year.

The following report outlines the current economic state of the construction industry in the UK and worldwide. We have examined how the UK has arrived at it’s current situation and how the global economy downturn has influenced out current economic situation.

All contributing factors to the current recession are examined and the most relevant are applied to the current economic state. We have also looked at the “credit crunch” and how this is playing a significant role in the current market.

It was discovered from our research that in order for the government to restore the industry to it’s former glory, financial institutions will need to release funding and begin investing in construction projects again.

The Construction industry in the Current Economic Climate

The UK economy in general has received a massive blow over the past 12-15 months. The British Chambers of Commerce said it’s survey results were awful and the worst since it began in 1989. The Bank of England has slashed interest rates from 2.0% in January 2009 to just 1.5%. VAT has been reduced from 17.5% to just 15% in December 2008 until 2010, until the economy recovers.

The construction industry in particular has been greatly affected with 2008 seeing a massive downturn. Experts outlined that more than 100,000 construction jobs have been lost in the last year, and that there is worse to come in 2009.

This has become apparent with the UK being officially labelled at being the grasp of a recession in January 2009.

The RICS is forecasting that 300,000 jobs will be lost in the construction industry over all during the recession. The worst sector to be hit with this unemployment will be the housing market, but unemployment is not exclusive to this sector of the industry.

With the UK being immersed heavily in the “Credit Crunch”, financing new projects going forward will be a key issue for government and developers alike.

So what is the credit crunch all about? A credit crunch can be defined as follows: A sudden downturn in lending precipitated by distress at financial institutions.

Many construction firms have outlined that there decision to let staff go is mainly attributed to this credit crunch. Persimmon has cut 2,000 jobs, Taylor Wimpey 1,900 jobs, Barrat 1,200, Bellway 850 and Bovis Homes 600 jobs. With limited funds available, contractors are restricted in the undertaking of new projects going forward.

According to Price Waterhouse Coopers the downturn has probably already forced more than 2,000 construction firms to go under, and without projects like the Olympics, Crossrail and initiatives on health and education, it could have been worse.

This current economic climate is not solely applicable in the UK, other once strong economies such as the USA and Japan are also suffering.

The US economy

The World may be on the brink of the “worst economic downturn since World War II” according to accountants Deloitte & Touché.

Key Factors Leading to Global Economic Downturn

The stresses in the financial markets of the United States that first emerged in the summer of 2007 transformed themselves into a full-blown global financial crisis in the fall of 2008: credit markets froze; stock markets crashed; and a sequence of insolvencies threatened the entire international financial system.

Massive liquidity injections by central banks and a variety of stopgap measures by governments proved inadequate to contain the crisis at first.

The initially hesitant policy response has become increasingly robust. The United States government introduced a $700 billion rescue package and has taken equity positions in nine major banks and several large regional banks.

Various debt and deposit guarantees have also been introduced. At the same time, European governments have announced plans for equity injections and purchases of bank assets worth some $460 billion, along with up to almost $2 trillion in guarantees of bank debt.

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Virtually no country, developing or high- income, has escaped the impact of the widening crisis, although those countries with stronger fundamentals going into the crisis have been less affected.

There are many experts outlining different reasons for the current economic situation and the most relevant factors relating to the decline of the UK economy can be outlined as follows:

1. Changes in house prices.

UK house prices have been rising much faster than inflation, this has created a wealth effect and improved consumer confidence, therefore spending and AD increase. A fall in house prices, however, sees the opposite effect. E.g. when house prices fell 15% in 1992, the UK entered a recession, with negative growth of 2%.

2. Fluctuations in Stock Markets

The big fall in stock markets triggered falls in consumer confidence and can overall lead to a recession. The Wall street crash of 1929 was a primary cause of the great depression. However, the stock market crash of 1987 did not cause an economic downturn. In fact in the UK it was followed by an unprecedented economic boom. This was partly due to the way the government responded Cutting income tax and cutting interest rates.

With the collapse of Lehman brothers on Monday the 15th of September 2008 the domino effect began. At 9am, shares in HBOS, Britain’s biggest mortgage lender, crashed 34 per cent in early trading. By noon, panic had gripped the London Stock Exchange and the FTSE had shed almost 400 points. No one could believe it.