Brexit Weighed on Construction in March

  • Marginal reduction in overall construction output
  • Commercial work remains weakest performing area
  • Residential building rises at fastest pace for three months

THE RECENT soft patch for UK construction output continued during March. Another fall in commercial work and civil engineering activity more than offset the only modest upturn in residential building. New business and employment numbers increased slightly at the end of the first quarter, reflecting subdued underlying demand and delays to decision-making among clients.

Adjusted for seasonal influences, the headline seasonally adjusted IHS Markit/CIPS UK Construction Total Activity Index posted 49.7, up fractionally from 49.5 in February but still below the 50.0 no-change threshold. The sustained decline in total construction activity represented the first back-to-back fall in output levels since August 2016, although the rate of decline remained only marginal in March.

Brexit Risk
Commercial construction was the worst performing area during the latest survey period, with business activity dropping to the greatest extent since March 2018. There were widespread reports that Brexit uncertainty and concerns about the domestic economic outlook had led to risk aversion among clients. Civil engineering activity also fell in March, although the rate of decline eased since February.

Residential building bucked the downward trend seen across the wider construction sector in March. The latest upturn in housing activity was only modest, but still the strongest seen so far in 2019.

Intense competition
March data revealed a marginal increase in new work received by UK construction companies, with the rate of expansion remaining subdued in comparison to the long-run survey average. Survey respondents commented on intense competition for new work and a reluctance among clients to commit to major spending decisions in March. Mirroring the trend for new orders, latest data also highlighted only a modest rise in staffing levels at UK construction companies.

Input buying rebounded slightly in March, followed a decline during the previous survey period. Some firms commented on stock building efforts as part of their Brexit preparations, which helped to boost purchasing activity. Meanwhile, suppliers’ delivery times lengthened markedly in March, which survey respondents attributed to low stocks and stretched capacity among vendors.

Average cost burdens increased at a sharp and accelerated pace during March. The rate of input price inflation was the fastest since November 2018. Higher raw material costs were attributed to the weak sterling exchange rate and, in some cases, shortages of available items among regular suppliers.



Uncertainty

Meanwhile, business optimism edged up from the four-month low seen during February. However, the degree of positivity remained much weaker than the long-term survey average. A number of construction companies noted that economic and political uncertainty had weighed on business expectations for the next 12 months.

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply: “The situation in the UK construction sector was broadly unchanged from February, with PMI data posting a second consecutive month in contraction. The fault of this continuing inertia was placed squarely at the feet of Brexit.

Given the lack of warehousing space in the UK and the difficulties of storing bulky items, it is evident the sector has pressed the panic button in its attempt to keep projects moving during the political impasse. “It is unlikely that next month will bring about any positive news given the challenges of a weaker UK economy, volatile pound and intense competition for new orders, as Brexit continues to cast a long shadow over the sector’s future.”

Response
Brendan Sharkey, Head of Construction at MHA MacIntyre Hudson comments: “The general feeling is of an industry ticking along, with enough business to get by but with no immediate prospects of growth.

“The collapse of Interserve does not threaten the industry in the same way as Carillion’s demise. However, there is not much sign other players are moving away from the low-profit high-turnover model that lies behind Interserve’s fall. Balfour Beatty is still leading the way in showing you can make money out of construction.

“The industry needs a stimulus in the form of some big projects from the government; currently it is getting by on the tailwind provided by Hinkley Point and the Elizabeth line, but it is to be hoped the pipleline fills up once Brexit is out of the way.”

Sarah McMonagle, FMB Director of Communications, said: “The construction industry is being seriously affected by Brexit uncertainty as evidenced by two very worrying sets of results for construction output in the first quarter of 2019. Businesses have been waiting for politicians to come to some resolution for far too long now, and it’s time that this deadlock was broken. It’s not surprising employers are finding it hard to plan for the future, when we don’t even know when, or indeed if, we’re leaving the EU. Today’s results are a reminder of just how vulnerable the construction industry is to political turmoil as confidence among consumers and contractors continues to wobble.”

 

 

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