Activity in the UK construction sector “dropped like a stone” last month as suffered its steepest fall in output since the height of the financial crisis, according to a closely followed industry index.
Construction activity plummeted to its lowest level since April 2009 in June, on the back of the sharpest drop in UK housebuilding demand for three years.
IHS Markit’s UK Construction Purchasing Managers’ Index (PMI) revealed that total construction activity fell to a reading of 43, sharply down from 48.6 in May.
Anything below a measure of 50 marks a decline in activity on the PMI index.
Commercial construction dropped for the sixth month in a row, recording its steepest fall since December 2009 in the process.
Construction firms told IHS Markit that delays to projects as a result of Brexit uncertainty had hurt commercial activity, leaving it the worst performing area in the sector.
Civil engineering output also declined at the quickest rate since October 2009. Political uncertainty, delays to new projects and longer waiting periods for the award of new contracts all hurt activity.
Meanwhile new orders dried up, sinking to their lowest level in a decade.
“Purchasing activity and new orders dropped like a stone in June,” said Duncan Brock, group director at the Chartered Institute of Procurement & Supply.
“This abrupt change in the sector’s ability to ride the highs and lows of political uncertainty shows the impact has finally taken its toll.”
IHS Markit pointed to “weakness across the board”, but warned that political uncertainty over whether the UK leaves the EU with a deal or not has spread to the housing market.
It came as UK house prices endured another “subdued” month of growth, according to today’s Nationwide house price index.
Tim Moore, associate director at IHS Markit, warned the figures were so bad it was “almost impossible to sugarcoat” the industry’s performance.
“While the scale of the downturn is in no way comparable that seen during the global financial crisis,” he said, “the abrupt loss of momentum in 2019 has been the worst experienced across the sector for a decade.”
Sterling fell 0.22 per cent against the dollar to $1.261 this morning.
The UK’s manufacturing sector recorded its worst month in six years in June, IHS Markit said yesterday.
UK construction sector contracted in March for the second month in a row, it was revealed today, as a slowing commercial market and Brexit uncertainty weighed on the sector.
The construction purchasing managers’ index (PMI) stood at 49.7 in March compared to 49.5 in February, the first back-to-back fall in output since August 2016. A score of under 50 marks a contraction compared to the month before.
The PMI, part of a survey released by IHS Markit and the Chartered Institute of Purchasing and Supply (CIPS), gives a comprehensive overview of the health of the sector.
Commercial construction – building for the private sector – was the worst performing area during the latest survey period, with widespread reports in the survey of Brexit uncertainty leading to lower client demand.
Residential construction bucked the trend, however, and saw the strongest upturn so far in 2019. This was despite statistics from mortgage lender Nationwide that last week showed UK house price growth was soft in March, having been dragged down by London’s worst house price drop in a decade.
There was also a modest rise in staffing levels at UK construction companies while business optimism edged up from the four-year low seen in February, IHS Markit/CIPS said.
However, Duncan Brock, group director at CIPS, said: “Not a small rise in job creation, optimism and new orders, nor resilient house building, were enough to buck the underlying downward trend in a sector suffering from client hesitation and consumer gloom,” he said.
He added: “The fault of this continuing inertia was placed squarely at the feet of Brexit.”
Yet Samuel Tombs of Pantheon Economics was more optimistic, saying: “With mortgage rates unlikely to rise much even when the [Bank of England’s] monetary policy committee starts to increase the bank rate again and the Help to Buy scheme set to operate at least until 2023, housebuilding should keep rising.”
He said: “Meanwhile, high profit margins and low borrowing costs lay good foundations for a recovery in business investment in the second half of this year, provided Brexit uncertainty subsides.”
Businesses faced higher costs in March, the survey revealed, with higher raw material prices due to the weak sterling exchange rate and a pick up in inflation.
IHS Markit economist Joe Hayes said: “Fears that the recent weakness of the UK construction sector may not be just a blip, but a sustained soft patch, were further fuelled by latest data.”
“UK construction businesses ramped up their purchases of materials and other inputs, reflecting efforts to build safety stocks ahead of any potential Brexit-related disruptions,” he said.
Yesterday it was reported that such stockpiling had caused the manufacturing sector PMI to hit a 13-month high as the industry responded to higher client demand.
However, Hayes said that in construction stockpiling meant that “supply chain constraints persisted and average input lead times lengthened once again.”
– The UK construction industry saw a soft start to 2019.
– As Brexit uncertainty hit commercial building segment.
– Economy and BoE rate outlook hinged on Brexit outcome.
The UK construction sector saw a soft start to the New Year, according to IHS Markit PMI data released Monday, with both current activity and new order growth slowing during the January month in a manner that could bode ill for other sectors of the economy.
January’s IHS construction PMI came in at 50.6, down from 52.8 in December, when economists had anticipated a decline to only 52.6. That’s the lowest level for the index since March 2018 when a fortnight of snow and inclement weather brought the industry to a standstill.
All three subsectors of the industry saw current activity levels soften this January, with commercial construction firms seeing the most notable deceleration. Companies told IHS that uncertainty over Brexit and the impact an EU exit will have on the economy is the main thing holding them back.
Growth in the civil engineering sector continued in January although at a reduced pace from the 19-month high seen back in December, while the supply and demand disparity in the UK housing market meant residential construction firms saw only a modest deceleration last month.
“Uncertainty about Brexit has snuffed out the recovery in the construction sector. The total activity index dropped to its lowest level since the March 2018 snowstorms and now is below the 52 level which in practice has separated rising from falling construction output in the past. Builders have become more pessimistic about the outlook too,” says Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
Above: IHS Markit activity index.
PMI surveys measure changes in industry activity by asking respondents to rate conditions for employment, production, new orders, prices, deliveries and inventories. A number above the 50.0 level indicates industry expansion while a number below is consistent with contraction.
Markets care about the data because it is an important indicator of momentum within the economy. And economic growth has direct bearing on consumer price pressures, which dictate where interest rates will go next.
Despite the downbeat tone of survey responses addressing conditions in January, most firms are still optimistic about the outlook for the year ahead. However, this could easily change during the months ahead if the UK leaves the EU without any formal agreement governing life after exit day.
Prime Minister Theresa May failed on the first attempt to pass her highly contentious Withdrawal Agreement through the House of Commons, although the bill will be put to another vote before MPs next week.
If it is not ratified before March 29, 2019 the legal position is the UK will leave the EU and default to trading with it on World Trade Organization (WTO) terms. Most economists now say that would weigh on UK economic growth in the short and long term.
“The outlook for the construction sector is quite binary, based on the Brexit path chosen by politicians. In the unlikely event of a no-deal Brexit, the sector likely will slide into another recession, amid weaker business confidence and tighter credit conditions. But provided a deal is signed off, the construction sector likely will enjoy strong growth soon,” Pantheon’s Tombs adds.
Above: Construction PMI alongside ONS construction output measure. Pantheon Macroeconomics.
UK manufacturers also saw conditions deteriorate at the beginning of the New Year amid heightened uncertainty over the outlook for international trade, given the U.S trade war with China and almost the trajectory of the Brexit process.
January’s survey of the all-important services sector will be released on Tuesday, which means analysts will then have an idea of just what kind of start to the year the UK’s three largest economic sectors saw. This will be important for the Bank of England (BoE)interest rate outlook and Pound Sterling.
Bank of England officials have said repeatedly in recent months that they see inflation pressures building in the economy and that further interest rate rises will be necessary over the coming quarters if the consumer price index is to sustainably return to the 2% target over the coming years.
However, the exact trajectory of inflation will depend on the performance of the economy over the coming quarters, which itself will be heavily influenced by the outcome of the Brexit process in parliament. The deal-or-no-deal question is most key to the outlook.
“This week’s BoE Inflation Report will see growth and inflation revised lower and the Bank playing up Brexit uncertainty as a policy constraint, but SONIA is still biased strongly toward higher rates this year,” says Adam Cole, chief currency strategist at RBC Capital Markets. “We expect PM May’s “new ideas” to amount to little and the EU to remain intransigent on the backstop.”
About: Market expectations of BoE base rate. Source: Pantheon Macroeconomics.
The BoE has raised its interest rate twice since November 2017, taking the Bank Rate up to 0.75%, but BoE officials are still saying that further rate hikes will be necessary if inflation is to remain under control in the coming years.
Unemployment has reached its lowest level since 1975 in the UK during recent months, as the post-referendum economy continues to create new jobs, and the number of unfilled job vacancies is still at a record high according to the Office for National Statistics.
This is forcing employers to raise wages and salaries for workers, which the BoE says will lead to even higher inflation further down the line. And the consumer price index is already above the bank’s target of 2%.
Inflation came in at 2.1% for December, down from 2.3% previously but in line with the consensus among economists. However, core inflation rose from 1.8% to 1.9% during the same month.
Core inflation excludes volatile commodity items like fuel, food, alcohol and tobacco from the goods basket so is thought to provide a more accurate reflection of domestically generated price pressures.
The latest economic forecasts suggest the consumer price index will fall again in January but that it will average 2.1% in 2019 even after one more rate hike.
The BoE will announce its latest interest rate decision and economic forecasts at 12:00 on Thursday 07, February.
The Government must not be complacent about the damage a ‘no deal’ Brexit would cause amid positive signs of growth in the UK construction industry, says the Federation of Master Builders (FMB).
Commenting on the construction output figures for November 2018, published by the Office for National Statistics, Sarah McMonagle, Director of External Affairs at the FMB, said: “The UK construction sector grew by 2.1 per cent during September to November 2018 compared with the previous three months. This is despite unparalleled levels of political uncertainty around the very real prospect of a ‘no deal’ scenario. However, we are urging the Government not to allow these results to create a false sense of security. Since November, political uncertainty has cranked up and is increasing every day. A growing and prosperous construction sector will be a distant memory if the Government allows the UK to crash out of the EU without a deal in place.”
McMonagle concluded: “The construction industry is also extremely concerned about the Government’s proposed post-Brexit immigration system. In the Immigration White Paper, published at the end of last year, the Government revealed that they will make few allowances for low skilled workers to enter the UK post-Brexit. Most tradespeople will be defined as low skilled and therefore will not be permitted to enter the UK, regardless of whether they are from the EU or further afield. It is crucial that the Government introduces a post-Brexit immigration system that continues to allow us to draw on essential migrant workers or else their house building and infrastructure targets will be totally unachievable.”
A disappointing end to 2018 for the UK economy could be confirmed by official GDP figures later this week, analysts have warned.
Last week the closely-followed IHS Markit/ CIPS Purchasing Managers’ Index (PMI) revealed a three-month low in UK construction sector activity in December and a 29-month low in job creation in the services sector.
But the manufacturing sector posted a near-record increase in stock holdings in December.
Economists predicted a 0.1 per cent rise in GDP for November, when the Office for National Statistics release figures on Friday – it would leave the UK on track for the lowest GDP rise since 2009.
“We think that a repeat of the previous month’s modest 0.1% expansion in the size of the economy is likely,” Martin Beck, analyst at Oxford Economics, said.
Beck added that while a composite measure of PMIs in November dropped to the lowest level since July 2016, it would be offset by a strong performance in the retail sector and upbeat industrial data for the month.
The research firm also expected GDP to rise 0.3 per cent in the fourth quarter to leave 1.4 annual growth – the lowest since 2009.
Daiwa Capital Markets also said last week’s PMI data implied “minimal growth” in the final quarter of the year and predicted GDP growth of 0.1 per cent in November, unchanged from October, but on track for a “sharp slowdown” from the 0.6 per cent growth in the third quarter.
The investment bank’s analysts also expected manufacturing and construction output to be stronger for November than the previous month but a slowdown in services activity.
They said: “The manufacturing and construction PMIs, released the past couple of days, provided a mixed picture of business sentiment at the end of the year.
On the whole, however, we took a downbeat message from them, not least as the boost to manufacturing activity mainly reflected stock building ahead of a possible no-deal Brexit.”
Official figures released today have revealed that the UK construction industry has continued to grow over the last quarter despite uncertainty around Brexit.
The IHS Markit/CIPS UK Construction Total Activity Index posted its second-highest level in 16 months at 53.2 in October, up from 52.1 in September.
However it was still some way below the long-run survey average of 54.3.
This was in part due to a slowdown in housebuilding across the UK which has put a drag on the construction industry.
Blane Perrotton, managing director of the national property consultancy and surveyors Naismiths, said: “The construction industry is enjoying an Indian Summer.
“True, the surge in output in the third quarter is flattered by comparison with the grim decline of the first quarter and the plodding indifference of the second. But this is real, and welcome, progress.
“Housebuilding retains its crown as both poster child and ‘get out of jail’ card for the industry as a whole. Housebuilders delivered a half billion boost to the industry in the third quarter, but elsewhere the growth was patchy at best. Infrastructure work remains in positive territory but output is down, with contractors focusing on finishing existing projects rather than starting new ones.
“Among developers there is a widening confidence gap between the overheated South East and other areas where demand is stronger and margins better.
“Despite a marked improvement in the Brexit mood music this week, months of deadlocked negotiations have choked investor appetite. Unless and until the political limbo is ended, the industry will continue its holding pattern of two steps forward and one step back.”
Britain’s third largest economic sector, the construction industry, has been mired in recession for three consecutive quarters. Economists are now looking for signs this downturn eased during February.
The UK construction industry enjoyed a surprise boost during February, according to the latest IHS Markit Construction PMI, although “there is little sign of an imminent turnaround in overall growth momentum”.
February’s IHS Markit PMI index rose to 51.4, up from 50.2 in January, when economists had forecast a much more meagre increase to 50.5.
This marks the first rise for the index in three months and, although IHS say the growth outlook remains bleak, it may provide some hope that the three-quarter downturn in the industry is now easing.
The PMI is a survey that measures changes in business conditions in the construction industry from month to month. It asks respondents to rate current conditions across a range of areas including employment, production, new orders, prices, supplier deliveries and inventories.
A number above the 50.0 level indicates industry expansion while a number below is consistent with contraction.
A sudden jump in commercial construction activity was the biggest contributor to February’s gains which, expanding at its fastest pace since May 2017, is notable because the commercial segment made the greatest contribution to 2017’s downturn.
“Civil engineering was the worst performing category of construction work, with activity falling at the sharpest pace for five months. A soft patch for house building continued in February, meaning that residential work remained on track for its weakest quarter since Q3 2016,” IHS Markit says.
“At the same time, strong input cost pressures were reported in February, with higher raw material prices, fuel bills and staff wages reported by survey respondents.”
PMI surveys frequently overestimate economic activity and IHS Markit Construction survey is no different.
The construction survey has printed only one number that is consistent with an industry recession during the last 12 months yet official output data shows the industry has contracted for three separate quarters.
Nonetheless, February’s report rhymes with the changing tone of the latest Office for National Statistics data, covering December, which showed the three-quarter downturn easing a touch in the final month of last year.
Construction is Britain’s third largest economic sector. Much of its earlier weakness was the result of commercial construction being hindered by Brexit uncertainty and oversupply of new office space in key hubs like London.
Residential activity has remained robust, in broad terms, although it has softened a touch of late.
The London market has been an exception to this as stamp duty tax changes and the outcome of the Brexit referendum in June 2016 have both hit demand for prime real estate in the capital.
Friday’s data comes closely on the heels of the IHS manufacturing PMI, which showed the manufacturing index slipping for the third month running as production slowed in February while export order book growth moderated a touch.
It also comes after a flurry of other gloomy news for the UK, the economy and its currency. Nationwide Building Society data released Thursday showed UK house prices falling 0.3% in February, following a brief and surprise pickup in January.
“Month-to-month changes can be volatile, but the slowdown is consistent with signs of softening in the household sector in recent months,” Robert Gardner, chief economist at Nationwide, wrote in a note accompanying the figures.
ONS says UK economic growth was in fact 0.4% during the final quarter, not the 0.5% previously suggested by the ONS, dealing a blow to observers who had cheered a last minute lift in UK economic momentum during 2017.
The annual pace of growth was also downwardly revised, from 1.8% to 1.7%, with the revised number marking a fall from the 1.9% growth seen back in 2016.
That was the result of downward revisions to industrial production figures, due to the closure of a key oil pipeline in the North Sea, and business investment having ground to a standstill.
This data came closely on the heels of the fourth quarter labour market report, which showed the unemployment rate rising for the first time since July 2015. The ONS attributed this to a rise in the participation rate rather than an increase in job losses.
All of this matters for the Pound because it could impact on the Bank of England and its thinking about whether the UK will be able to sustain another rise in interest rates. It hiked the base rate by 25 basis points already, to 0.50%, in November.
For what it’s worth, the fourth quarter growth performance was in line with the BoE’s forecasts and it’s well known now the bank’s primary concern is inflation, which sits stubbornly at 3%.
So far, the bank says it’s taken heart from the broad fall in unemployment over recent years, which is now beginning to push wages higher, and because of this it is less willing to play it cautious by holding back on interest rate rises.
Nonetheless, a further deterioration in UK economic conditions, particularly around unemployment and Brexit, may change this.