Brexit hampers construction activity

Richard Furlong - City Surveys Group

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Published: 26th October 2017

This Article was Written by: Richard Furlong - City Surveys Group

  


So it would seem it’s official. Worries over Brexit have led to commercial construction clients turning their back on risk.

The most recent monthly survey of Construction Purchasing Managers by Markit/CIPS UK suggests that activity dropped in September 2017 – the first fall in over twelve months.

The seasonally-adjusted figure – which is used an indicator of the state of health of the UK construction industry – dropped to 48.1 in September from 51.1 in August.

The result indicates the sharpest downturn in overall construction output since July 2016, coming in a full point below expectations. More importantly, the figure for construction dipped below the crucial 50.0 threshold that demonstrates no change.

A similar survey of Manufacturing Purchasing Managers for September also returned a diminishing PMI – although it has some way yet to drop below the all-important 50.00 threshold.

The PMI data supports a wider reported drop in both commercial construction and civil engineering activity during September.

Most worryingly, the civils sector is experiencing the lowest level of activity for four and a half years; this has been attributed to a lack of new infrastructure projects replacing completed contracts.

House building did register some growth during September, but even here momentum has eased to a six-month low. It remains to be seen for just how long growth continues to be the trend in this particular area.

Confirming Brexit-related suspicions, the survey found respondents largely referred to political and economic uncertainty as reasons for the drop in activity.

Requests by clients for extensions to lead times to approve budgets was another reason cited – a delaying tactic perhaps, and another indicator of an increased aversion to risk.

New business volumes also dropped for a third consecutive month in September – this is the longest sustained drop since early 2013.

The downward trend is starting to have an adverse effect on jobs within the construction sector, with a marked decrease in job creation in building firms plus a drop in sub-contractor usage throughout September.

Author of the Construction PMI, Tim Moore, said: “Fragile client confidence and reduced tender opportunities meant that growth expectations across the UK construction sector are also among the weakest for four-and-a-half years. At the same time, cost pressures have intensified, driven by supply bottlenecks and rising prices for imported materials.

“Commercial development has been the worst performing category in recent months. Construction firms attributed falling volumes of commercial work to subdued business investment and reduced risk appetite among clients, linked to heightened economic and political uncertainty.

Director of Customer Relationships at the Chartered Institute of Procurement & Supply (CIPS), Duncan Brock, said: “A dismal picture of construction emerged this month as the sector showed signs of worsening business conditions across the board. With the biggest contraction in overall activity since July 2016, and a drop in new orders, optimism was in short supply.”

Samuel Tombs of Pantheon Macroeconomics said: “The construction sector is entering its own recession. The government’s shift to a more accommodating stance in Brexit talks has done little to convince builders that clients will sanction delayed projects soon”

Unsurprisingly, expectations for growth into 2018 have also fallen to their lowest point in recent times; among survey respondents optimism is at its lowest point since April 2013.

This sector-wide autumnal gloom is set to continue into the chilly winter months and beyond. The September survey suggests that disappointing results are likely to be seen in third-quarter growth figures too, just in time for the Bank of England to raise interest rates.


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