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Construction sector's downhill course 'seriously disappointing development'

Published 02/08/2016

The report said that despite the uncertain business outlook for the sector, overall demand was resilient for housebuilding and infrastructure projects last month
The report said that despite the uncertain business outlook for the sector, overall demand was resilient for housebuilding and infrastructure projects last month

The UK's construction industry saw its fastest fall since June 2009 as the sector came under pressure from economic uncertainty sparked by Britain's vote to leave the European Union.

The closely-watched Markit/CIPS construction purchasing managers' index (PMI) was 45.9 in July, down slightly from 46 in June but above economists' expectations of 44.

A reading above 50 indicates growth.

The report said the drop was driven by the steepest fall in the commercial building sector for more than six-and-a-half years, while civil engineering activity also tumbled for the first time in 2016.

But it added that new orders had fallen at a slower pace in July than the month before, indicating some resilience from the sector despite concerns over the Brexit vote.

It comes on the same day builders' merchants Travis Perkins said in a second-quarter update that it was suffering from weaker demand as a result of the EU referendum, but cautioned that it is too early to say what the full impact will be.

Concerns about an imminent slowdown in the UK economy were underscored on Monday when the PMI for Britain's manufacturing industry showed the sector had slumped to its lowest level for more than three years, hitting 48.2 in July, down from 52.4 the month before, as it counted the cost of Britain's decision to ditch the EU.

The string of reports pointing to a lacklustre performance from the UK economy has sharpened the focus on this Thursday's interest rate announcement, with many economists expecting the Bank of England to cut the cost of borrowing and increase quantitative easing in a bid to shore up economic growth.

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 i nquiries in anticipation of lower charges."

However, he said construction firms were seeing clients adopt a "wait and see approach" in July rather than cancelling upcoming projects altogether.

The report said that despite the uncertain business outlook for the sector, overall demand was resilient for housebuilding and infrastructure projects last month.

It added that the number of people working in the industry had dropped for the first time since May 2013, as there was not enough new work to replace finished projects.

It also triggered the availability of sub-contractors to climb at its fastest rate since September 2012 as demand for their services weakened.

David Noble, group chief executive officer at the Chartered Institute of Procurement & Supply (CIPS), said: "Though a marginal drop in the index compared to last month, the sector's downhill course is a seriously disappointing development, with purchasing activity falling for the second consecutive month, and following another drop in new orders.

"The index also recorded the lowest business confidence since April 2013, and the fastest overall fall in output since June 2009. Commercial building bore the main brunt of this downturn with the largest decrease in activity for six-and-a-half years."

The report comes as the UK economy showed signs of strength in the run-up to Britain's referendum on the European Union, with official figures revealing that gross domestic product (GDP) grew by 0.6% for the second quarter, up from 0.4% in the first quarter of 2016.

The Office for National Statistics said the higher-than-expected figure was driven in part by a swing in industrial production, which rose 2.1% over the period - matching figures last seen 17 years ago - compared with a 0.2% fall in the quarter before.

However, s ome economists have even suggested that Britain could be heading towards another recession.

Think-tank EY ITEM Club said last month that the UK economy should brace itself for a ''severe loss of momentum'' following the Brexit vote, as it slashed its forecasts for UK economic growth from 2.3% to 1.9% this year, and from 2.6% to 0.4% in 2017.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said he could not see the construction sector escaping its recession within the next year.

He added: "The much healthier condition of the banks in this crisis suggests that the construction sector's developing downturn will be much milder than the collapse in 2008/09, which saw a peak-to-trough fall in output of 17%.

"Still, the likelihood that Brexit negotiations will be protracted suggests that businesses will remain reluctant to commit to major capital expenditure for a long time to come."

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