UK construction market pessimism

08 February 2012

Despite a rise in January's UK construction purchasing managers' index (PMI) and figures showing that fewer contractors had slipped into insolvency in the fourth quarter of last year, industry commentators have cast doubts over prospects for the sector in 2012.

January data signalled a 13th successive monthly rise in UK construction sector output, but the rate of growth had eased month-on-month, reflecting a slowdown in new orders. The seasonally adjusted construction PMI stood at 51.4 in January, compared to 53.2 in December (50 is the PMI level which separates expansion from contraction).

Sarah Bingham, economist at Markit and author of the UK construction PMI report, pointed out that the January figure represented a four-month low. "Growth was focused on commercial construction, with house building and civil engineering activity levels both falling slightly. The resulting overall increase in output was insufficient to sustain job creation, with employment stagnating."

And Andrew Duncan, director of property at consultancy Turner & Townsend, said that the modest rise in the UK's construction PMI looked more disappointing when set against the fact that January is traditionally is an upbeat month for the construction sector.

"Early indications for 2012 are that things have improved since the last quarter of 2011 - and that more work is coming down the pipeline. Certainly there are more bidding opportunities about, even if there is intense competition on price. And that's why the encouraging levels of confidence are still not being converted into anything more than meagre levels of new business," he said.

Downcast outlook

Indeed, the latest RICS Construction Market Survey reiterates this downbeat assessment. The outlook for the industry remained downcast, with respondents questioned during the fourth quarter of last year projecting that workloads would be broadly flat over the next 12 months, as well as further falls in employment and profit margins.

In addition, only 14% of those surveyed stated they felt the government would be successful in generating sufficient institutional funding for planned infrastructure projects.

RICS chief economist Simon Rubinsohn said, "We would hope that this scepticism proves to be overly pessimistic, but the responses highlight the sizable job the government still has to do in convincing industry professionals that this approach is going to deliver."

Fewer insolvencies

But there was some good news, at least, with new figures from the Insolvency Service suggesting a surprising reduction in the number of UK construction companies that went into administration during the fourth quarter of 2011.

Head of construction at Baker Tilly Restructuring & Recovery Mark Wilson said he cautiously welcomed the news. "Today's numbers show that administrations have fallen from 94 in the third quarter to 71 in the fourth quarter of 2011 - a reduction of nearly 25%.

"However, there is always a time lag in getting new projects off the ground and therefore the full impact of the delayed economic recovery may yet be still to be seen," he added.

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