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Brexit uncertainty delivers worst month in seven years for construction industry

Published 04/07/2016

The UK construction industry recorded its weakest performance for seven years in June
The UK construction industry recorded its weakest performance for seven years in June

Britain's construction industry has experienced its worst month in seven years as Brexit uncertainty triggered a shock contraction on the run up to the EU referendum.

The closely-watched Markit/CIPS construction purchasing managers' index (PMI) recorded a worse-than-expected 46.0 in June, down from 51.2 in May and well below economist expectations of 50.6. A reading above 50 indicates growth.

The sharp contraction was driven by a "steep decline" in house building and the first fall in commercial construction work since May 2013.

It also revealed the sharpest drop in new business volumes since December 2012 amid mounting uncertainty surrounding Britain's vote on the European Union.

The responses were collected between June 13 and 29, with 80% coming in before the referendum result on June 24.

Tim Moore, senior economist at Markit, said the speed of the downturn in the days leading up to the Brexit vote provided "a clear warning flag for the wider post-Brexit economic outlook".

He said: "Widespread delays to investment decisions and housing market jitters saw the UK construction sector experience its worst month for seven years in June.

"Construction firms are at the sharp end of domestic economic uncertainty and jolts to investor sentiment, so trading conditions were always going to be challenging in the run-up to the EU referendum."

He added: "The vast majority of June's survey responses were received ahead of the EU referendum, so the worry is that the ensuing political turmoil will hit construction spending decisions for some time to come.

"As a result, the latest figures raise the likelihood that the Bank of England will inject additional stimulus this summer in an attempt to dampen the short-term impact of Brexit uncertainty on the real economy."

The survey found that firms had reacted to the slowdown in demand by trimming input buying and recruitment , with employment rising at one of its weakest rates since 2013 in June.

But while the industry slumped back to levels last seen in 2009, the rate of contraction was still "much slower" than during the last economic downturn.

Housebuilders have seen their share prices come under significant strain following the Brexit vote, with Charles Church owner Persimmon down 26% compared to last week.

David Noble, chief executive of the Chartered Institute of Procurement and Supply (CIPS), said ambiguity and indecision triggered by the referendum had "flung the industry into unknown territory".

He said: "Gloom and fragility descended on the sector with the steepest drop in new orders since December 2012.

"Caused by the continuing insecurities in both the global and UK economies and the hesitancy shown by clients to commit to projects before the EU referendum, overall activity was at its frailest for seven years."

He added: "The only glimmer of light through the brickwork is the rate of decline was not as sharp as that experienced during the last recession.

"But, with business confidence at a three-year low, and purchasing activity at its lowest level for six-and-a- half years, this is likely to offer little comfort."

Howard Archer, chief European and UK economist at IHS Economics, said : " Additionally, construction companies' input costs could well be pushed markedly higher by a sharply weakened pound. A substantial amount of building components and materials are imported."

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