UK construction tumbles

05 July 2016

UK construction output has fallen at the fastest pace since June 2009, with a sharp reversal reported in residential and commercial activity, according to the latest data collected by Markit/CIPS (Chartered Institute of Procurement & Supply) UK Construction PMI (purchasing managers’ index).

Also finding that incoming new work was declining at the steepest pace since December 2012, the PMI June data was said to signal a return to falling output levels across the UK construction sector, led by a steep decline in residential building and a reduction in commercial work for the first time since May 2013.

The data was collected between 13 and 29 June. Respondents were said widely to link the downturn in business activity to uncertainty ahead of the UK’s EU referendum.

It said that just over 80% of survey responses had been received before the referendum on 24 June, when a majority voted to leave the union.

Heightened uncertainty also contributed to a further reduction in new invitations to tender, it found, with the latest data pointing to the sharpest drop in new business volumes since December 2012.

Meanwhile, softer demand conditions acted as a brake on staff recruitment in June and contributed to a drop in purchasing activity for the first time in just over three years.

At 46.0 in June, down from 51.2 in May, the seasonally adjusted Markit/CIPS UK Construction PMI dropped below the neutral 50.0 threshold for the first time since April 2013.

The latest reading pointed to the weakest overall performance for exactly seven years, but the rate of contraction was said to be much slower than seen during the 2008/09 downturn.

Residential construction was the worst performing sub-category of activity, with activity falling at the fastest pace since December 2012. Civil engineering activity remained broadly stable in June, while commercial building work saw a sharp loss of momentum and posted one of its weakest readings for six-and-a-half years.

It was said that lower levels of activity were overwhelmingly linked to deteriorating order books and a corresponding lack of new work to replace completed projects.

A number of firms commented on a reluctance among clients to start new contracts in the run-up to the EU referendum, alongside ongoing uncertainty about the general economic outlook.

Incoming new work has now fallen for two months running, and the latest reduction was the steepest since December 2012. Construction firms responded to the deterioration in client demand by cutting back on input buying and exerting greater caution in terms of their staff recruitment.

The decline in purchasing activity was the fastest for almost six-and-a-half years.

Tim Moore, senior economist at Markit and author of the Markit/CIPS Construction PMI, said, “Construction firms are at the sharp end of domestic economic uncertainty and jolts to investor sentiment, so trading conditions were always going to be challenging in the run-up to the EU referendum.

“However, the extent and speed of the downturn in the face of political and economic uncertainty is a clear warning flag for the wider post-Brexit (the UK leaving the EU) economic outlook.”

He said house building activity was worst affected by the uncertain business climate in June, closely followed by commercial work. Civil engineering was the only stabilising influence, which he said underlined the need to shore up decision making on infrastructure projects and help offset any further loss of momentum across the wider construction sector.

Professor Noble Francis, economics director at the UK’s Construction Products Association, said, “This was a very sharp fall in the Markit/CIPS for construction activity in June overall, and particularly in private housing and commercial, two of the largest sectors.

“In terms of what we have seen within the industry, commercial activity in central London still continues apace, and there is also still a lot of activity in cities like Birmingham and Manchester.”

He added, “Infrastructure activity was broadly flat, which is not surprising as it has a longer lead in time, so the majority of work occurring in this sector is on large projects based upon contracts signed in 2014 and 2015.”

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