Construction downturn is steepest for seven years
Latest monthly survey of construction purchasing managers reveals a further decline in activity in July.
Anecdotal evidence suggests that economic uncertainty following the EU referendum was the main factor weighing on business activity in July, especially in the commercial building sector.
The seasonally adjusted Markit/CIPS UK construction purchasing managers’ index (PMI) registered a score of 45.9 in July, down fractionally from 46.0 in June and below the 50.0 no-change mark for the second month running.
July 2016 thus saw the steepest overall decline in construction output since June 2009 at the height of the global economic crisis. Commercial building was the biggest faller but civil engineering activity also slowed for the first time in 2016.
Residential construction also declined at a solid pace in July, but the rate of contraction eased from June’s three-and-a-half year low.
Survey respondents noted that uncertainty following the EU referendum had dampened client confidence, led to greater risk aversion, and encouraged a wait-and-see approach to decision making. That said, after taking into account the uncertain business outlook, there were also some reports that overall demand had been relatively resilient in July, especially for house-building and infrastructure projects.
Insufficient new work to replace completed projects resulted in a decline in employment numbers for the first time since May 2013. In general, we are not yet at the stage of laying people off; survey respondents mostly cited the non-replacement of voluntary leavers. Subcontractor availability rose at its fastest pace since September 2012 and this weaker demand for subcontractors contributed to the slowest rise in their average charges for more than three years.
Materials prices increased at their steepest rate since March 2015, despite lower demand for inputs. This was overwhelmingly linked to the weaker sterling exchange rate.
Meanwhile, the latest survey signalled a fall in confidence regarding the year-ahead business outlook to its lowest since April 2013.
Markit senior economist Tim Moore, author of the Markit/CIPS construction PMI, said: “July’s survey is the first construction PMI compiled entirely after the EU referendum result and the figures confirm a clear loss of momentum since the second quarter of 2016, led by a steep and accelerated decline in commercial building. Reduced volumes of new work to replace completed projects contributed to a fall in employment for the first time in just over three years.
“UK construction firms frequently cited ongoing economic uncertainty as having a material negative impact on their order books. In particular, survey respondents noted heightened risk aversion and lower investment spending among clients, notwithstanding a greater number of speculative enquiries in anticipation of lower charges.
“Meanwhile, exchange rate depreciation resulted in sharper input cost inflation and there are concerns that additional supplier price rises for imported materials could be around the corner.
“However, it’s not all bad news, at least insofar as the decline in construction output was little-changed from June’s seven-year low. There were also some reports that demand patterns had been more resilient than expected given the uncertain business outlook. Reflecting this, new order volumes and purchasing activity both dropped at a slightly slower pace than in the previous month.
“Construction firms generally suggested that clients had adopted a wait-and-see approach rather than curtailed or cancelled forthcoming projects during July. While there is little to suggest an imminent turnaround in business conditions, a relief factor appears to have softened the fall in business optimism among UK construction companies.
“Latest data showed that confidence regarding the year-ahead outlook eased further following the EU referendum, but only to a level last seen in April 2013 and one that is still well above the record lows experienced in 2008/09.”
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This article was published on 2 Aug 2016 (last updated on 4 Aug 2016).