The Effect of Micro and Macro-Economic On Construction Industry

THE EFFECT OF MICRO AND MACRO-ECONOMIC 1

Institution Affiliation:

Construction firms have to make decisions about prospectiveinvestment plans by considering a number of microeconomic andmacroeconomic factors. In order to do this, there has to be anempirical research into these economic factors, so as build supportfor any decisions that the construction firm makes. In the UK, theconstruction segment is a vital sector for the country’s economy,and comprises of a number of products, services and technologies. Allthese vary in terms of the economic value they generate, and as such,have different implications for the construction industry. Given thesize and complexity of the industry, investors make severalmanagement and investment considerations. In order to makewell-informed decisions, the firm has to consider microeconomic andmacroeconomic factors which apply to the construction industry in theUK, and to assess what the future holds for their organization in theindustry. In this regards, the discourse looks at the numerouseffects of micro and macroeconomic on the construction segment in UK,and advises the construction firm on further action, based on theeconomic environment.

Macroeconomics influences

According to Shone (2014), macroeconomics can be defined as aninternational economy, whereby governments use similar objectives tomake considerations on how to overcome some complexities that mayadversely affect the national economy. These considerations are usedto make recommendations for application in various industries. In theUK, as pertains to the construction industry, the objectives ofmacroeconomics are to bring inflation under control, as a measure tohelp the government and industries to achieve the highest priorities.Some of the major macroeconomic considerations by the UK governmentare attaining high values of the Gross Domestic Product andemployment, while at the same time, bringing inflationaryconsequences under control.

In the UK economy, Erturk et al. (2012) say that the trade deficithas to be taken into account by the national government. However,there are possibilities that the same can be overlooked, when it isintrinsically related to short term trade. In some cases, thespending power of the consumers is another important factor.Therefore, the firm has to consider the current spending power of theUK residents to make decision whether to maintain their land bank andconstruct smaller number of houses, or to build many houses in thenext two years. In the UK, the inflation rate is highly influenced bythe ever rising construction material, such as steel and cement. Thisis set to influence the construction prices over the next decade.Therefore, the firm is supposed to invest in large housesconstruction in the next two years, and avoid having to pay more formaterial and labor by maintaining its land-bank.

While making the decision, the company has to take intoconsideration the government incentives. The UK government has usedboth monetary and fiscal policies to directly manage and organizemacroeconomics (Bernanke, 2013). In the country, the national Bankingregulator reduced the interest rates for the construction industry,in line with other major global economies. This was a move that wasinspired by the 2008 global recession, which meant that the globaleconomies had to get back their confidence. The mission by the UKgovernment was to push the country back to work and increasinginterest rates, which was move viewed by economists as a trial tokeep the construction investors on the operation and increasing theirinvestments. As such, the firm has to take advantage of thisgovernment incentive and work to increase their profits in the nearfuture, by investing in large houses over the next two years.Additionally, by initiating the project, the company will be workingwith the government’s ambition to take advantage of theconstruction industry to provide jobs for the low and middle-incomeworkers.

Microeconomic influences

The firm has to make a decision to build more houses over the nexttwo year by considering microeconomic data from the industries’indices. The output of the construction industry is defined as thechange by the construction companies to customers for the value ofwork. This excludes VAT and other payments that are made to thesub-contractors. In 2000, the production of the construction industrywas valued to be around 7% (Horta et al. 2013). In August 2014, theoutput was estimated to have fallen by about 3.9%, as compared tothat year’s previous record. According to the Office of NationalStatistics, the stakeholders in the construction industry have to beaware of the month-to-month contractions in growth. Towards the endof the year, all new work went down by 4.8%, with all new publichousing reporting decreasing. Infrastructure stood at 6.5%, privatehousing 5.5%, private commercial 5.6% and private industrial 4.9%(Office of National Statistics, 2015). The bureau of NationalStatistics specified that the fall in public housing was the greatestcontributor to the overall fall. Therefore, the firm has to maximizeon these falling figures, and construct bigger houses which will betaken up to cover the gaps left by the downfall. If the firm sits onits land bank and build smaller number of houses, it will not begetting the most out of the industry trends.

Figure1: UK private residence completion.

According to the graph above, there has been a decrease in the numberof private residential that have been completed in the UK since 1970.There are some microeconomic factors that are attributed to thistrend. These microeconomic factors are demand and market.

In the UK, the housing demand is influenced by a number of factors.The first factor is population growth. According to projections, theUK’s population is rising and is predicted to hit over 71 millionin the next 20 years. Therefore, construcxting small houses will notbe considered a solution in as regards to this projection. Thegovernment is most likely to inplement policies for large residentialunits to be occupied by families, rather than smaller units to beoccupied by individuals. According to Pettinger (2014), the UK’sconstruction industry is already struggling to meet the housingdemands of the national population. A rising population means thatthe country’s investors and stakeholders in the constructionindustry have to increase their effort, which increase the pressureon the consumers too. As it was mentioned in the UK housing crisis bythe parliament in 2014, the persistent shortage of housing wasworsened by the investor’s unwillingness to invest in construction.

Figure2: House prices to earnings for first-time buyers likely to keeprising.

The firm has to attract investors to pump money into ambitiousprojects for profits increment. One of the factors influencing demandis an overseas investment into the London housing market inparticular. According to Green and Bentley (2014), interest in theLondon property market from the overseas has grown significantly overthe past few year. These investors spend up to billions of poundsevery year. However, this spending affect other segments other thanthe central London properties. The ripples are felt out to thesuburbs and beyond. Every structure that is put up in London iscontrolled by interest from these overseas investors, and the effectcan be felt by the young relatively well-paid young people who wishto buy property. As such, London property, and the UK in general, hasbeen considered an investment potential for the future. This givesthe firm a reason to invest in bigger houses over the next two years,which will give it leverage to receive better prices for itsproperty.

Another significant microeconomic factor to be considered by thefirm is the country’s housing market. According to Lambert (2015),the UK’s house prices has become a “national obsession” andthus, a key driver of the country’s economy. The house pricescontinue increasing as the property capital remains expensive.However, recently, there has been a recorded slight decrease in thepeak prices. Except for London, which was the only region that wasnot able to record a rise in the house prices in February 2015, otherregion’s house prices had been increasing for the previous 6months. Nevertheless, according to the Royal Institution ofChartered Surveyors, there were signs that the trend was startingto turn around. Some economists forecast that in the future, theprices of property in the UK will become more unaffordable, and overthe next 30 years, the figures will reflect a 30% rise (Lambert2015). The biggest winners in this forecast are the property owners,who would have invested enough in property construction andprocurement. This means that the company has to consider building alarge number of houses over the next two year to increase returns.This recommendation is backed by the fact that there are factors suchas rising wages, stamp duty and increasing spending power that willboost demand from the house-buyers.

Conclusion and recommendations

This paper recommends that the firm builds large number of housesover the next two years, given the evaluation of the microeconomicand macroeconomic factors. The considerations made have carefullyinvestigated the market environment and forecasts. According to theanalysis, investing in small units would mean that the company is notinvesting in the future of the industry. It would be advantageous forthe company to consider the past and recent trends in the UKconstruction industry, and make decisions which will be mostprofitable for them in the future. The macroeconomic factors thathave been considered are the country’s trade deficit and monetaryand fiscal policies. The microeconomics factors considered are demandand market trends. The demand factors include population growth andoverseas investment into the London housing market. The marketfactors considered are the house prices and regional price trendsacross the UK. According to the research done, it would be best forthe construction firm to build a large number of houses in the comingtwo years. This is because the move will put the firm in a betterposition to gain maximum profit from the indications of themicroeconomic and macroeconomic factors in the UK building industry.Additionally, this move will give the firm time to attract moreinvestors from the foreign platform, who have been identified as thelargest investors in terms of capital investment in the constructionindustry.

Bibliography

Bernanke, B (2013) “Monetarypolicy and the global economy”,&nbspspeech,London, March,&nbsp25.

Erturk, I, Froud, J, Johal, S,Leaver, A, &amp Williams, K (2012, March) “Accounting for nationalsuccess and failure: Rethinking the UK case”, In AccountingForum&nbsp(Vol.36, No. 1, pp. 5-17), Elsevier.

Green, D, G and Bentley, D, (2014) Finding shelter: Overseasinvestment in the UK housing market, [Online] Available at &lthttp://www.civitas.org.uk/pdf/FindingShelter.pdf&gt [Accessed 21April 2015]

Horta, I, M, Camanho, A, S, Johnes,J, &amp Johnes, G, (2013) “Performance trends in the constructionindustry worldwide: an overview of the turn of the century”,&nbspJournalof Productivity Analysis,&nbsp39(1),89-99.

Lambert, S, (2015) What next for house prices? House prices riseacross the UK but the London market has caught a chill, This isMoney, [Online] 13 March 2015, Available at &lthttp://www.thisismoney.co.uk/money/mortgageshome/article-1671748/House-prices-What-expect-news-predictions.html&gt [Accessed 21 April 2015]

Office for National Statistics, (2014) Output in the constructionIndustry, August 2014, Office for National Statistics, [Online]Available at&lthttp://www.ons.gov.uk/ons/rel/construction/output-in-the-construction-industry/august-2014/index.html&gt[Accessed 21 April 2015]

Pettinger, T (2014) Impact of rising population in the UK, Economicshelp [online] 22 May 2014, Available at&lthttp://www.economicshelp.org/blog/11031/uk-economy/impact-of-rising-population-in-the-uk/&gt[Accessed 21 April 2015]

Shone, R, (2014)&nbspMicroeconomics:a modern treatment,Academic Press.