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UK construction output declines for third consecutive month

Output in the UK construction sector declined for the third month running in July as lower volumes of work were recorded across all three broad categories of activity.

The IHS Markit/CIPS UK Construction Total Activity Index recorded 45.3 in July – below the 50 no-change value – to mark the third consecutive monthly fall.

The latest reading was up from June’s ten-year low of 43.1 but still signalled a marked downturn in total construction activity.

The latest survey also revealed a sharp drop in new order intakes, which survey respondents mainly attributed to subdued economic conditions and domestic political uncertainty. Weaker demand contributed to a slide in business optimism towards the year-ahead outlook for construction activity, with the degree of confidence the lowest since November 2012.

Commercial construction was the worst-performing category in July, followed closely by civil engineering activity. Anecdotal evidence suggested that risk aversion among clients in response to Brexit uncertainty continued to hold back work on commercial projects. At the same time, some survey respondents noted that delays to contract awards for infrastructure work had acted as a headwind to civil engineering activity.

Housebuilding fell for the second month in a row during July, but the rate of decline was only modest and eased from the three-year record seen in June. Reports from construction companies suggested that sluggish housing market conditions had a negative influence on residential work during the latest survey period.

July data pointed to a downturn in total order books across the construction sector for the fourth successive month, which is the longest continuous period of decline since 2016. Lower volumes of new business were often linked to a lack of tender opportunities amid weaker domestic economic conditions and ongoing political uncertainty.

Employment numbers were cut back in response to deteriorating order books, although the rate of job shedding was only modest and largely reflected the non-replacement of voluntary leavers. Sub-contractor usage meanwhile decreased for the sixth consecutive month.

Demand for construction products and materials continued to soften, as signalled by a solid drop in purchasing activity during July. This helped to alleviate some of the pressure on supplier capacity, with lead times lengthening to the smallest extent since September 2016. A robust rate of input cost inflation persisted in July, partly reflecting rising prices for imported items and those in short supply (particularly insulation and plasterboard).

Construction companies meanwhile reported a sharp drop in their confidence regarding the year-ahead outlook for business activity. The latest reading was the lowest since November 2012. Survey respondents often cited Brexit uncertainty, the prospect of a General Election and delays to infrastructure work.

Tim Moore, economics associate director at IHS Markit, said: “UK construction output remains on a downward trajectory and another sharp drop in new orders has reduced the likelihood of a turnaround in the coming months.

“Total business activity declined at a softer pace than the ten-year record seen in June, but this should not detract attention from the challenges ahead for the construction sector. Customer demand has been squeezed on all sides in recent months, which has pushed down business expectations to the lowest since the second half of 2012.

“July data revealed declines in house building, commercial work and civil engineering, with all three areas suffering to some degree from domestic political uncertainty and delayed decision-making.

“Construction companies have started to respond to lower workloads by cutting back on input buying, staffing numbers and sub-contractor usage. If the current speed of construction sector retrenchment is sustained, it will soon ripple through the supply chain and spillovers to other parts of the UK economy will quickly become apparent.”

Responding to the statistics, the Federation of Master Builder (FMB) called for a delay to the implementation of Reverse Charge VAT.

Brian Berry, chief executive of the Federation of Master Builders, said: “The fall in construction activity for the third month in a row and business optimism being at its lowest levels since 2012 means the building industry is heading towards crunch time. The Government must immediately postpone its plans for a complex and burdensome tax change if the supply chain is to start to turnaround its consistent decline. The time is not right to implement Reverse Charge VAT, which would restrict cashflow and add extra administrative burdens which risk sending small businesses to the wall. The government’s guidance on the policy is confusing and complex, and it wasn’t published with enough time for companies to prepare.”

Berry added: “Reverse Charge VAT, Making Tax Digital and a no-deal Brexit will create the perfect storm for construction’s small businesses, and today’s PMI data shows that the resilience is not there to weather it. If we are to deliver the housing and infrastructure that we need now and in the future, we will need to maintain capacity in the construction industry which means looking after the supply chain. The government must support the industry by delaying Reverse Charge VAT for six months at least.”

Mark Robinson, Scape Group chief executive, added: “New work and business optimism dropped in July as customer demand plummeted for the third month in the row, in response to the increasingly gloomy economic outlook and heightened political uncertainty.

“A no-deal Brexit in October is looking more likely than ever – which is terrible news for the sector. Not only is the knock-on effect on the pound likely to make the cost of construction materials shoot up even more, but an end to free movement will see thousands of skilled workers return home, further deepening the skills shortage that the sector faces.

“All eyes are now on Boris to get Britain building again. Bold decision making, clear commitments, and guaranteed funding for infrastructure investment all have a proven track record of igniting economic recovery and growth. We are counting on his ‘can do’ attitude to cut through the paralysis on decision-making we are experiencing in the public sector.

“With just three months until our Brexit date, there is no room for error. Boris’ government now hinges on a majority of one, but right now a general election will only further distract Whitehall from the issue at hand – securing a deal that works for all.”

Source: Scottish Construction Now