Construction Declines at Second Sharpest Pace Since April 2009

THE UK CONSTRUCTION industry remained firmly stuck in a downturn at the end of the third quarter.

Building activity fell at the second-fastest rate since April 2009, only narrowly outpaced by June’s decline. A historically steep drop in new orders was also registered, while firms trimmed employment at the fastest rate since the end of 2010 due to unfavourable demand, client hesitancy and low confidence. Although there was a marginal pick-up in optimism, the level signalled by survey data was still historically weak.

The headline seasonally adjusted IHS Markit/CIPS UK Construction Total Activity Index posted 43.3 in September, down from 45.0 recorded in August and thereby signalling a more severe downturn in building activity across the UK. Moreover, the deterioration was the second-strongest since April 2009 and broad-based across all three broad categories of construction work.

Worst performing

As has been the case since March, commercial activity was the worst-performing segment. Here, the contraction gathered pace and was marked overall. Meanwhile, civil engineering activity dropped at a similarly sharp rate that was the fastest in close to a decade. A fourth successive monthly decrease in residential building was also signalled.

Latest survey data highlighted further demand weakness in the UK construction sector. Having fallen at the steepest rate since March 2009 last month, there was little sign of any recovery in September as new work inflows dropped at similarly substantial pace.

Panellists attributed the marked slowdown to Brexit uncertainty and the resulting hesitancy caused among clients, as well as a general underlying weakness in demand.

Purchasing activity

The strong dip in sales coincided with a further tapering of purchasing activity by UK construction companies in September. Buying levels declined at the joint-fastest rate since January 2010 due to lower operational requirements and increased efforts to contain costs.

Nevertheless, input prices continued to rise at a strong rate during September. The rise in costs was partly linked to greater fuel expenses and higher supplier charges for certain raw materials. However, the rate of inflation eased to a three and-a-half-year low in line with deteriorated input demand. Still, panellists reported bottlenecks and material shortages at suppliers, both of which contributed to further delivery delays.

Looking ahead, UK construction firms were mildly optimistic that output volumes would pick up over the coming 12 months, although the level of business confidence was weak by historical standards. Competitive pressures, Brexit uncertainty and concerns towards the economy led to a subdued year-ahead outlook.

In line with weak optimism, further cost-cutting efforts were apparent as employment was reduced in the UK construction sector during the latest survey period. The fall in staffing levels was the sixth in as many months and the strongest since the end of 2010.

Joe Hayes, Economist at IHS Markit, which compiles the survey said: “The UK construction sector remained mired in a downturn at the end of the third quarter, according to the latest PMI data. Activity is being pulled down at its second-fastest rate for over a decade as firms are buffeted by client hesitancy, heightened Brexit uncertainty and a weak outlook for the UK economy.

“The commercial sector was a notable casualty in September, with building activity here falling at the fastest rate since April 2009, highlighting the damaging effects of project delays and belt-tightening.

“Low confidence has subsequently caused construction order books to fall substantially. Panellists reported another sharp drop in demand in September that was one of the strongest in the post-crisis era.

“Forward-looking indicators suggest that businesses are bracing themselves for a protracted construction slump, with input purchasing and employment both falling at rates unsurpassed since 2010.

“Overall, the performance of the UK economy once again hinges on the service sector showing a marked degree of resilience to offset the weakness seen in construction and manufacturing.”

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply added, “The construction sector offered another devastating result in September with the second fastest fall in new orders since March 2009 and the financial crisis. After a relentless six-month decline in order books driven by Brexit uncertainty and political indecision, this is hardly surprising.

“Residential building continued to be hit hard with a fourth successive month of deterioration but the commercial sector took the biggest brunt of this downturn spiral as clients turned their back on spending and committing to larger projects. This in turn had significant knock-on effects on construction employment with the biggest fall in staffing levels since December 2010. Such disappointing news as the sector is still recovering from a lack of skills and capacity created by the last recession.

“Looking ahead the signs do not look positive. Even a moderation in input prices since March 2019 and some moderate improvement in supply chain pressures will not be enough to keep the wolf from the door as no-deal looms and businesses remain Brexit unsteady.”

Phil Harris, Director at BLP Insurance, comments, “With figures showing little forward momentum after a fifth consecutive month of industry contraction, the Brexit squeeze continues to take its toll.

“The summer malaise has endured into the autumn as major projects continue to be hit by delayed starts, refinancing and tweaks in planning. After an injection of infrastructural promises following the change of government, inertia has crept back in and progress is back on ice.

“We mustn’t lose sight that the UK construction sector is at its core robust and built on solid foundations. The industry is poised and elastic, ready to snap back into action but waiting for the green light from government. Whitehall and market leaders need to set the tone and lead by example.

“If PM Boris Johnson can carve out the legislative space to make good on the flurry of infrastructural commitments, this could provide the vital dose of confidence needed to kick-start growth. HS2 continues to serve as a litmus test of what could be. If the promised review results in cancellation then the shockwaves are likely to hurt both the residential market and general sentiment.

“At the same time, the established players can share the burden by pushing ahead on new projects and granting assurance to the wider sector that not all is doom and gloom. While losses from Kier last month will stir memories of Carillion, its situation is far less tenuous and no reason for the market to stay bogged down in caution.”

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