June’s PMI shows a stall, not a standstill

The latest UK construction PMI made grim reading, showing the weakest sector performance for seven years. June data signalled falling output levels across the UK construction sector, led by a steep decline in residential building and a reduction in commercial work for the first time since May 2013.

The figures fell short of the economists’ worst predictions, indicating a contraction for the first time in three years. This data could be interpreted as a cautionary sign of the damage the current uncertainty is doing to the building industry.

Brian Berry, Chief Executive of the FMB, said, “June’s PMI figures, which show a huge dip in construction output, reflect our fears that uncertainty over the outcome of the EU referendum would hit our sector. In the wake of the UK’s vote to leave the EU, there is a growing concern that this period of uncertainty is only just beginning. Construction is an industry that is particularly vulnerable to dips in confidence and it appears that many clients were hesitant to commit to new projects as they were unsure of what the future held.”

However, even though residential construction was the worst performing sub-category of activity, falling at the fastest rate since December 2012, industry authorities have warned against taking a short-term view when the fundamentals of the UK’s house-building industry remain intact. “It is dangerous to look at such figures in isolation and you need to look at long terms trends to get a clear picture,” said Steve Turner, spokesperson for the FMB.

“We have been undersupplying homes in this country for decades and as a result face an acute shortage,” he added. “The Help-to-Buy scheme is helping thousands of people a week purchase a new home, whilst interest rates remain at historically low levels and could potentially drop further. As such the underlying demand for new homes remains extremely strong and builders will continue to scale their output to meet this demand.”

John McAuliffe, Managing Director of McAuliffe Group, said that general construction activity and the smaller subset of housebuilding need to be analysed separately, as general construction work is linked to public sector spending and larger commercial developments. The decline, though alarming, was not as steep as in 2008 and housebuilders are in a stronger position than they were back then.

“National housebuilders have been bitten once by the recession and, as a result, they have sharpened their cashflow processes,” said McAuliffe. “Housebuilders are largely better managed businesses; for example, many now link staged land payments to sales outputs. New market entrants such as Legal & General, as well as larger build-to-rent operators, will also be a growing market.”

McAuliffe believes there is plenty of work in the pipeline, however there may be a delay before it comes to fruition. “Housebuilding activity outside London should not fall in the short-to-medium term,” he said. “However, we may see an impact on current land transactions being delayed slightly, with people using the current climate to negotiate a better deal. While the dust settles, there could also be short term delays to large planning applications and housebuilders may delay bringing forward strategic sites to planning stage. However recent trading statements suggest that sales are remaining strong.”

According to Berry, the industry needs a roadmap to steer it away from uncertainty, which can only be achieved when the government provides some clarity on the UK’s exit from the EU.

“Today (4 July)’s results underline the importance of clear leadership from the Government – it’s imperative that it attempts to offset any uncertainty firms will be feeling. Today’s announcement by the Chancellor that he would seek to lower corporation tax to below 15% is a positive step, as was Greg Clark’s recent reaffirmation that the government will still aim to build one million new homes by 2020.

“However, much more needs to be done. Dithering over infrastructure decisions will send out entirely the wrong message to firms of all sizes. More than ever, investment is needed in a sector that generates £2.84 in the wider economy for every £1 spent.  Public investment in our sector could play a vital part in warding off an economic slump, but today’s findings show that it will be far from business as usual.”