Construction activity falls for first time in more than a year

construction-stockA sustained drop in new work has led to the first reduction in overall UK construction activity since August 2016.

The Markit/CIPS UK Construction Purchasing Managers’ Index fell to 48.1 last month from 51.1 in August. The latest reading signalled the steepest decline in overall construction output since July 2016.

Survey respondents attributed the drop in workloads to Brexit-related confidence jitters and commercial clients turning their back on risk.

Lower volumes of construction work reflected marked falls in both commercial and civil engineering activity during September. The reduction in civil engineering work was the steepest for almost four-and-a-half years, which some firms linked to a lack of new infrastructure projects to replace completed contracts.

Construction buyers were also pessimistic about future prospects with optimism for the next 12 months hitting its second lowest level since April 2013.

Tim Moore, associate director at IHS Markit and author of the report, said: “A shortfall of new work to replace completed projects has started to weigh heavily on the UK construction sector.

“Aside from the soft patch linked to spending delays around the EU referendum, construction companies have now experienced their longest period of falling workloads since early 2013.

“Fragile client confidence and reduced tender opportunities meant that growth expectations across the UK construction sector are also among the weakest for four-and-a-half years.

“At the same time, cost pressures have intensified, driven by supply bottlenecks and rising prices for imported materials.

“Commercial development has been the worst performing category in recent months. Construction firms attributed falling volumes of commercial work to subdued business investment and reduced risk appetite among clients, linked to heightened economic and political uncertainty.

“Civil engineering work decreased at its fastest pace since April 2013, which prompted concerns from survey respondents about a near-term lack of new infrastructure projects.

“House building slipped down a gear in September, which highlighted that fragile confidence has spread across all three key market segments.”

Duncan Brock, director of customer relationships at the Chartered Institute of Procurement & Supply, added: “A dismal picture of construction emerged this month as the sector showed signs of worsening business conditions across the board. With the biggest contraction in overall activity since July 2016, and a drop in new orders, optimism was in short supply.

“Respondents pointed to obstructive economic conditions and the Brexit blight of uncertainty, freezing clients into indecision over new projects. Even housing, the stalwart of the construction sector stuttered with a dwindling performance, but civil engineering was the biggest victim falling to its weakest level for four and a half years.

“The contagion continued all along the supply chain as material shortages placed a strain on delivery times and increased commodity prices were affected by the weak pound.

Despite a marginal increase in employment figures, this wasn’t enough to dispel the descending autumnal gloom where it is unclear where any major shift in momentum for the sector will come in the next few months.”

Howard Archer, chief economic advisor to the EY ITEM Club, said the “hugely disappointing survey” will fuel suspicion that the construction sector likely contracted again in the third quarter.

He said: “The Markit/CIPS purchasing managers’ survey shows construction activity lost momentum for a fourth month running in September to register its first contraction since August 2016.

“Specifically, the headline index fell back to a 14-month low of 48.1 in September from 51.1 in August, 51.9 in July, 54.8 in June and a 17-month high of 56.0 in May. This points to only marginal expansion given a reading of 50.0 indicates flat activity.

“The overall marked loss of momentum in construction activity in recent months points to heightened economic, political and Brexit uncertainties fuelling clients’ caution over committing to new projects.”

Mr Archer added: “It looks highly probable that construction output contracted in Q3 and was a drag on GDP growth, although the sector only accounts for 6.1% of total output.

“Latest hard data from the ONS shows that construction output fell 0.9% month-on-month in July, which was a fourth successive decline. Consequently, construction output was down 1.2% in the three months to July compared to the three months to April. Furthermore, construction orders fell 7.8% quarter-on-quarter in the second quarter to be at the lowest level since the first quarter of 2014.”

On the outlook for construction, he said: “Muted economic activity and appreciable economic and political uncertainties threaten to be a highly challenging combination for the construction sector over the coming months.

“Furthermore, despite the improvement in housebuilding activity in August, there is a possibility that house building activity could be pressurized by extended lacklustre housing market activity and subdued prices amid weakened consumer fundamentals.

“There is the particular concern that potential clients will be cautious over committing to major projects if economic, political and Brexit uncertainties remain elevated over the coming months.

“Construction companies will be hoping that recent government measures aimed at boosting infrastructure and housebuilding have a material beneficial impact.”

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