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21st May 2012
The past few weeks have been turbulent for the Eurozone, its member states and those economies linked to the troubled area. With France under new leadership, Spain’s banking sector struggling and Greece failing to form a government, there has been much to concern politicians and worry financial markets. If the situation deteriorates, what will it will it mean for the UK construction industry?
After failing to form a government, Greece is set for fresh elections. This uncertainty has led more people to withdraw deposits from Greek banks, increasing the pressure on an already desperate situation. Greece has never seemed more likely to leave the Euro and spark a fresh crisis.
If this was to happen, British banks would be affected. Britain’s banking system’s exposure to Greece is limited. However, we have much closer ties to countries such as France, whose banks will have greater exposure to Greece, while a Greek exit could increase the likelihood of larger economies leaving the Euro. The indirect costs of a Greek exit could therefore be significant to British banks.
Though Michael Cohrs, who is on the Bank of England committee for monitoring financial risks, has reassured that British banks are positioned to cope well with a possible crisis, if British banks have to internalise losses on Eurozone debt this could have a negative impact for business lending.
In addition, the Council of Mortgage Lenders have said that Mortgages could become more scarce and expensive, and that short term prospects for the UK housing market were linked to the unfolding turmoil.
A further crisis in the Eurozone would also have a profound effect on business confidence in the UK. Despite exports to non-EU countries increasing recently, Europe is still our biggest trading partner. Lower demand from the continent, coupled with restricted lending, would be likely see a drop in confidence and possibly disruptions to investment. This could be bad news for the industrial and office sectors of the UK construction industry as they begin to recover from years of contraction.
Such negative conditions will be strong headwinds for the UK economy to face and would make it much trickier for George Osborne to achieve economic growth while still committing to close the budget deficit. There will be strong pressure to adjust the strict fiscal restraints placed upon the economy, and an obvious beneficiary of any extra government spending would be the construction industry.
At a time when there is still high demand for schools and social housing, any extra pounds spent could have the dual effect of serving a real need and boosting the general economy. However, such an increase in spending from the coalition government seems unlikely.
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