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Construction buyers report steep slowdown in June

3 Jul 12 UK construction companies signalled a reduction in business activity at the end of the second quarter of 2012, with June seeing the sharpest drop in construction output for two-and-a-half years.

That is according to the monthly survey of construction purchasing managers, by economists at Markit, in conjunction with the Chartered Institute of Purchasing & Supply (CIPS).

At 48.2 in June, down from 54.4 in May, the seasonally adjusted Markit/CIPS Construction Purchasing Managers’ Index (PMI) pointed to the fastest rate of contraction for two-and-a-half years.(Any reading above 50 indicates growth.)

The fall in the index over the month was also the greatest since February 2009, signalling a loss of momentum following the expansion seen in the previous survey period.

Anecdotal evidence attributed part of the decline to the extra bank holiday in June, but panellists also widely commented on weaker underlying business conditions.

Civil engineering and housing activity were the worst performing broad areas of the construction sector, with both seeing a drop in output for the first time since the weather-affected downturn in January. Commercial activity meanwhile increased onlymarginally, and at the slowest pace for 28 months.

June data signalled a moderate drop in new work received by construction firms, thereby ending an eight-month period of expansion. The rate of decline was the fastest since April 2009. Reports from survey respondents generally pointed to uncertainties about the economic outlook and, in some cases, disruptions related to the extra bank holiday in June.

A lack of new work to replace existing projects, alongside the need to cut costs, resulted in a marginal decline in construction employment. This was the first fall in workforce numbers since February. Subcontractor usage also declined in June, and at the sharpest pace since August 2011.

Input buying in the construction sector decreased during June for the first time in a year-and-a-half, although the rate of reduction was relatively modest. Lower levels of purchasing activity were widely linked to weaker new order inflows in June. Meanwhile, supplier delivery times lengthened since May, with the latest deterioration in vendor performance the most marked in 14 months. Construction companies mainly linked this to low stocks at suppliers.

Average cost burdens increased in June for the 29th successive months. However, the rate of input price inflation was much weaker than in May. Survey respondents generally suggested that lower fuel prices had helped offset increased costs for energy and raw materials.

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Construction firms on balance still expect an increase in business activity over the next 12 months. But the degree of positive sentiment remained well below the long-run survey average, and the latest reading was the lowest since October 2011. Reports from the survey panel frequently cited concerns about the weakening business outlook as having dampened their forecasts for output over the year-ahead.

Tim Moore, senior economist at Markit and author of the Markit/CIPS Construction PMI, said: “The UK construction sector moved back into reverse gear in June, with output falling at its fastest pace since the end of 2009 amid a steep decline in civil engineering. A drop in business activity was perhaps inevitable given that the month started with an additional bank holiday and ended with severe weather across large parts of the UK.

“However, these temporary factors should not be overplayed, as the latest figures reveal worsening underlying business conditions within the sector. Construction firms’ assessment of future output dropped to an eight-month low in June, whereas past disruptions, such as heavy snowfall at the start of 2012 and the 2011 Royal Wedding, boosted future expectations as companies anticipated that a catch-up effect would follow.

“New business intakes meanwhile dropped at the fastest pace since April 2009, while a lack of work to replace completed projects resulted in falling employment after a three-month period of cautious job hiring.”

Chartered Institute of Purchasing & Supply chief executive David Noble said: “The renewed declines in construction output and employment are a reflection of the weakening trend in new orders seen in recent months. The contraction was accompanied by a similar fall in cost inflation, but this is scant consolation for businesses, as the global economy continues to cast a shadow over the industry.

“Sharp drops in new civil engineering and housing activity were almost matched by the slowdown in commercial activity. The anomaly of the double bank holiday at the start of the month will have had some negative impact but the underlying sluggishness throughout the industry could point towards a much softer period heading into the third quarter.

“Added to this is concern about the ability of firms to respond quickly to any rise in new orders. Delivery times for inputs lengthened again in June due to the low stocks reportedly being held by suppliers, highlighting a further worry for the health of the sector."

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