Referendum Costituzionale Unexpected decisions are becoming the norm in modern politics, to the extent perhaps that the lens through which we look at them needs to be changed. The referendum this week in Italy was intended to give more power to Italy’s lower house at the expense of its Senate. Despite early polling in favour, the clear decision (59%) against it, means subdued growth, a weakened Euro (fell 5% against USD), heighted risks to the Italian banking sectors, and a likely Italian exit from the currency (>70% according to CEBR). The vote was ostensibly a stand against Renzi’s leadership and reforms. However, there is a clear undercurrent of anti-establishment exasperation among austerity-hit Italians, where unemployment rate is high (12%) and growth is some of the slowest in the Euro area (0.3%). Had the Austrians voted-in the far-right Freedom Party, then this would have signaled a significant anti-EU shift this week. It is still, however, in the words of the German foreign minister, ‘not a positive development’ for the future of the EU.
Counting the cost Construction cost inflation is running at its highest since April 2011. In part this had been driven by a surge in the global cost of steel, which over the course of the year has risen 18%. The construction industry faces further challenges in terms of its workforce. 12% of construction workers are EU nationals, who may either be faced with visa issues, or find the case to work here less compelling on account of the currency devaluation. Development viability is being stretched from both ends, as value and cost sides come under pressure. With volumes of new supply across the UK in all sectors running low, for occupiers this might mean fewer options if they are not willing to pay a premium to underlying market tones, especially in tighter regional markets where viability is already stretched.
Low cost labour A briefing last week by the Migration Observatory at the University of Oxford showed foreign-born people working in the UK more than doubled between 1993 and 2015 (now making up almost 17% of the workforce, or 7 million people). The highest share of foreign workers – and the fastest growth – was in lower-skilled jobs. Despite this increase, the percentage of working-age UK residents in employment in Britain is the highest it has ever been. This serves to illustrate how immigration helps the economy in times of growth. Ironically, it might be an anti-immigration led vote that slows growth and creates sharper competition for fewer jobs. Those sectors reliant on low cost immigration (plant operations (42%), cleaning (35%) food preparation and hospitality (30%)) will be watching carefully both the growth figures, and any potential curbs on immigration.
Housing growth? A poll of analysts conducted by Reuters, suggests that house prices will rise on average 2% in 2017. There is a number of factors to consider beneath this headline. Firstly, although positive, if we see 4% inflation next year, this will mean a real terms fall in value of 2%. Secondly, London as a whole will likely see a fall in value in any event (0.5%), having enjoyed spectacular growth over the past five years. Thirdly, average figures have a habit of massively underestimating the potential growth in areas of structural local market changes, such as major regeneration initiatives. For investors, a tighter approach to stock selection will be key. For first time buyers, still presented with favourable borrowing rates, finding the deposit remains the central challenge.
Richard Pickering, Head of UK Research & Insight.