Sharpest Decline in Construction Output Since March 2018

UK CONSTRUCTION companies indicated a renewed decline in total business activity during May 2019, according to the latest IHS Markit / CIPS UK Construction PMI survey findings.

The survey also revealed that new orders decreased across the construction sector, with survey respondents noting that subdued domestic economic conditions had led to project delays and fewer tender opportunities.

At 48.6 in May, down from 50.5 in April, the seasonally adjusted Construction Total Activity Index registered below the 50.0 no-change mark for the third time in the past four months. The latest reading was the lowest since the snow-related downturn in construction output during March 2018.

The index reported that commercial building was the weakest area of construction activity in May, with output falling to the greatest extent since September 2017. Survey respondents widely commented that clients had opted to hold back on major spending decisions in response to Brexit uncertainty and concerns about the economic outlook.

May data also revealed a decline in civil engineering activity for the fourth consecutive month. Construction companies cited constrained client budgets and a headwind from domestic political uncertainty.

Residential work continued to expand in May, albeit at the weakest pace for three months. Higher levels of house building have been recorded in each month since February 2018.

Modest reduction in new orders
The latest survey pointed to a modest reduction in new orders received by UK construction companies, with the rate of decline the steepest since March 2018. Construction companies reported strong competition, hesitancy among clients and longer sales conversion periods, largely reflecting subdued demand conditions in May.

Reduced workloads led to more cautious recruitment strategies and the non-replacement of departing staff in May. As a result, the latest survey pointed to the sharpest drop in construction employment for six-and-a-half years.

Decline in purchasing activity
Construction companies reported another decline in their purchasing activity. Although only marginal, the latest reduction was the largest since September 2017. Supply chain pressures persisted in May, which led to another sharp lengthening of average lead times among vendors. There were a number of reports citing low stocks and shortages of materials (particularly plasterboard).

Average input prices continued to rise in May, which was often attributed to higher fuel and energy costs. However, the overall rate of input price inflation eased to its weakest since June 2016. Meanwhile, construction firms signalled a fall in business optimism to its weakest since October 2018. Survey respondents widely cited concerns that domestic political and economic uncertainty would dampen business activity growth over the next 12 months.

Phil Harris, Director at BLP Insurance, commented on the findings: “Despite last month’s bounce back into expansion territory, it was unsurprising to see a significant drop in today’s PMI figures under a cloud of continued political turmoil.

“Nevertheless, market fundamentals continue to remain positive. The planning pipeline for the residential sector is healthy, and a promising year-on-year boost in value (over 25%) for onsite office projects in the past few months could be a long-awaited inflexion point in the three-year commercial lull.

“However, with no clear Brexit resolution on the horizon, it is vital that the industry continues to embrace the underlying positives within the sector, avoiding the temptation to get bogged down in the Brexit quagmire.”

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