UK construction sector ‘navigating turbulent waters’ after Brexit

MarkitOutput in the UK construction sector fell again in July, though new orders decrease at slower pace, according to the Markit/CIPS UK Construction PMI.

The seasonally adjusted index, the first compiled entirely after the EU referendum result, recorded the fastest overall drop in output since June 2009 as all three sub-categories record lower output.

Anecdotal evidence suggested that economic uncertainty following the EU referendum was the main factor weighing on business activity in July, especially in the commercial building sector.

However, there were also reports suggesting that demand patterns had been more resilient than expected, and some firms linked new enquiries from international clients to exchange rate depreciation.

The PMI registered 45.9 in July, down fractionally from 46.0 in June and below the 50.0 no-change threshold for the second month running. The latest reading largely reflected the steepest fall in commercial building for over six-and-a-half years, alongside a drop in civil engineering activity for the first time in 2016.

Residential construction also declined at a solid pace in July, but the rate of contraction eased from June’s three-and-a-half year low.

Survey respondents noted that uncertainty following the EU referendum had dampened client confidence, led to greater risk aversion, and encouraged a wait-and-see approach to decision making. That said, after taking into account the uncertain business outlook, there were also some reports that overall demand had been relatively resilient in July, especially for house building and infrastructure projects.

Tim Moore, senior economist at Markit, said: “July’s survey is the first construction PMI compiled entirely after the EU referendum result and the figures confirm a clear loss of momentum since the second quarter of 2016, led by a steep and accelerated decline in commercial building. Reduced volumes of new work to replace completed projects contributed to a fall in employment for the first time in just over three years.

“UK construction firms frequently cited ongoing economic uncertainty as having a material negative impact on their order books. In particular, survey respondents noted heightened risk aversion and lower investment spending among clients, notwithstanding a greater number of speculative enquiries in anticipation of lower charges.

“Meanwhile, exchange rate depreciation resulted in sharper input cost inflation and there are concerns that additional supplier price rises for imported materials could be around the corner.

“However, it’s not all bad news, at least insofar as the decline in construction output was little-changed from June’s seven-year low. There were also some reports that demand patterns had been more resilient than expected given the uncertain business outlook. Reflecting this, new order volumes and purchasing activity both dropped at a slightly slower pace than in the previous month.

“Construction firms generally suggested that clients had adopted a wait-and-see approach rather than curtailed or cancelled forthcoming projects during July. While there is little to suggest an imminent turnaround in business conditions, a relief factor appears to have softened the fall in business optimism among UK construction companies.

“Latest data showed that confidence regarding the year-ahead outlook eased further following the EU referendum, but only to a level last seen in April 2013 and one that is still well above the record lows experienced in 2008/09.”

Richard Threlfall, head of infrastructure, building and construction at KPMG UK, said: “The Brexit vote is forcing the construction sector to navigate turbulent waters. The PMI’s anecdotal evidence suggests that economic uncertainty following the EU referendum was the main factor weighing on business activity in July, especially in the commercial building sector. The figures show the vote has also weakened demand for new orders, led to greater risk aversion, and encouraged a wait-and-see approach to decision making across the construction sector.

“In the longer term, a lot will depend on the path the UK carves out for itself: whether it chooses to sail the seas alone or manages to join a flotilla of like-minded others to make its prospects stronger. However, the economic impact will be significant under most outcomes, with UK GDP potentially 4 per cent to 6 per cent lower by 2031 than if the UK had voted to remain in the EU. This will inevitably impact on construction demand.

“Businesses need to start planning now for a range of possible scenarios including new tariffs and other trade restrictions, pressures on wages and labour availability, and a deterioration in public finances.”

Julie Palmer, Partner at Begbies Traynor, added: “Following the dire manufacturing PMI data, the UK’s construction industry has followed suit highlighting the weight of Brexit on this sector. UK construction has been one of the hardest hit sectors following the Brexit result. The rise in uncertainty will have led to a steep slowdown in investment activity and so, in the short term at least, UK construction will feel some pain.

“Indeed, our recent red flag data revealed that 22,651 construction companies were suffering from ‘significant’ financial distress suggesting that the foundations for the sector were already under pressure before the vote. It is likely that the UK construction industry will see further uncertainty over the coming months as investors delay decisions while the details of a Brexit are scoped out.”

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