Industrials

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Brexit Britain is slipping behind France in the economic stakes in more ways than one. The title of world's fifth-biggest economy is emblematic, but it's the world of construction that shows up the starkest differences.

U.K. construction growth indicators are at 11-month lows, the weak pound has pushed up costs, and new business is dwindling. A string of profit warnings has hit builders and support services providers, with Carillion Plc being the latest example. The list of risks from Brexit -- from a faltering economy to difficulties accessing funding and labor -- is long.

Opposite Paths
The pace of growth in the French construction industry caught up with the U.K. in 2017
Source: Bloomberg/Markit

Contrast this with France, where Emmanuel Macron is riding an economic rebound. Construction indicators there are on the up. Politics there is about reducing corporation tax and making it easier to hire and fire workers. The country is embarking on its most ambitious plan to overhaul Paris since Baron Haussmann 150 years ago; Britain, meanwhile, has just scrapped a pedestrian footbridge across the River Thames in London.

This divergence is evident in the stock prices of the largest construction companies. Shares of Eiffage SA and Vinci SA are outperforming Balfour Beatty Plc and Kier Group Plc.

Brexit Bump
Eiffage and Vinci outperformed U.K. builders Kier and Balfour Beatty since the Brexit vote
Source: Bloomberg

The irony here isn’t just that the market is treating France’s political path as more business-friendly than Britain. It’s also that Prime Minister Theresa May has pledged to build a “Global Britain” through big, government-funded infrastructure projects like the HS2 railway. That’s a Mitterrand-style promise from a Conservative government that relies on a fair amount on foreign labor and corporations from, well, France.

Eiffage and Vinci have won HS2 contracts alongside U.K. partners. State utility Electricite de France is building Britain’s first nuclear power station in more than two decades. The French firms are bigger in market capitalization and enjoy a healthier domestic market than their U.K. rivals.

Size Difference
French construction firms have bigger market value than rivals in the fragmented U.K. market
Source: Bloomberg data

The British market has historically been more fragmented, more competitive and has skinnier margins than in France. Analysts estimate operating margins of up to 2 percent in the U.K. compared with as much as 5 percent across the Channel.

One response could be for the Brits to bulk up and merge -- Carillion’s need to strengthen its balance sheet may be a trigger. But there are reasons to be skeptical. The company failed to merge with Balfour Beatty when times were good. Barring any big surprises, foreign players are here to stay.

If Britain succeeds in avoiding an economic catastrophe that strangles the construction industry (which accounts for about 7 percent of GDP) there's probably more opportunity for French firms. They might even be able to charge higher margins for more complex services.

Industry insiders hope Britain won't want to compound the self-harm of Brexit by making its own infrastructure ambitions impossible to achieve. It just may mean the taxpayer has to shoulder more of the cost. Ironically, big beneficiaries are likely to come from France. No wonder Macron has more reasons to be cheerful than May.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net