Construction slumps to 7 year low

Richard Furlong - City Surveys Group

Home » Construction slumps to 7 year low

Published: 9th August 2016

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

  


The Markit/CIPS UK Construction Purchasing Managers’ Index, the industry-standard report on construction activity nationwide, has recorded its second quarterly drop in performance with activity now at its lowest point in seven years.

Figures compiled by Markit Economics and the Chartered Institute of Procurement & Supply show that in July, immediately following the EU Referendum vote, the UK Construction PMI hit 45.9.

This is an index figure, based on a scale at which 50.0 indicates no change – figures below 50 are a sign of a shrinking market, and this is the second consecutive month where a decline has been reported, following a headline figure of 46.0 in June.

Purchasing is now at its lowest level since June 2009, early in the period of severe economic turbulence that came in the wake of the credit crunch, sub-prime lending crisis and related financial shocks on a global basis.

It follows, of course, the victory for Leave in the EU Referendum – commonly referred to as the Brexit vote – which came as a surprise to many following a narrowly fought campaign, and which now means the UK should eventually exit the European Union and strike new trade arrangements from outside of the continent’s common market.

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.”

He cited an ongoing link between economic uncertainty and negative pressure on construction firms’ order books, as clients show signs of reduced capital expenditure on new projects and an aversion to taking on any unnecessary risk.

David Noble, chief executive officer at CIPS, added: “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.”

With the sterling exchange rate falling sharply immediately following the EU Referendum result, this has driven material costs higher for many firms – and some have reacted to preserve their cash flow by holding less materials in stock.

However, Mr Noble commented on the fall in employment, arguing that this appeared to arise from a natural shedding of the workforce and a close watch on profit margins, and not from an overall downsizing in companies’ operations.

There is also some doubt as to the extent of the impact of the Brexit vote, with firms reporting more of a drop in new work in June – before the vote took place – than in July once the result was known.

Based on anecdotal evidence, the report suggests that the uncertainty of the vote had more of an effect than the outcome itself, with demand proving more resilient than was anticipated in some parts of the industry.

The steep drop in the value of the pound against international currencies including the euro may have led to increased material costs, but it has also made UK construction firms more affordable in real terms for customers based outside of the UK.

As a result, some firms reported a rise in international enquiries directly associated with the shifting exchange rate – an indication that overseas orders may actually increase for some in the wake of the Brexit vote.


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