UK construction output falls further in July

July data from the seasonally adjusted Markit/CIPS UK Construction Purchasing Managers’ Index (PMI) signalled a further downturn in UK construction output, however the rate of contraction was only fractionally faster than that seen during the previous survey period.

At the same time, new order volumes dropped at a slower pace than the three-and-a-half year low seen in June. Anecdotal evidence suggested that economic uncertainty following the EU referendum was the main factor weighing on business activity in July, especially in the commercial building sector.

However, there were also reports suggesting that demand patterns had been more resilient than expected, and some firms linked new enquiries from international clients to exchange rate depreciation.

“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,” said David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply.

“The index also recorded the lowest business confidence since April 2013, and the fastest overall fall in output since June 2009,” he added.

The PMI registered 45.9 in July, down fractionally from 46.0 in June and below the 50.0 no-change threshold for the second month running. The latest reading signalled the fastest overall decline in construction output since June 2009. Residential construction also declined at a solid pace in July, but the rate of contraction eased from June’s three-and-a-half year low.

Construction companies noted that weaker order books continued to act as a brake on business activity in July. Reflecting this, latest data signalled an overall reduction in new work for the third month running, but the rate of decline eased since June and was close to that seen in early-2013.

“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,” said Tim Moore, Senior Economist at Markit and author of the PMI. “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, according to Moore. In particular, survey respondents noted heightened risk aversion and lower investment spending among clients, notwithstanding a greater number of speculative enquiries in anticipation of lower charges.

“Meanwhile, exchange rate depreciation resulted in sharper input cost inflation and there are concerns that additional supplier price rises for imported materials could be around the corner,” said Moore.

However, it is not all bad news. After taking into account the uncertain business outlook, there were also some reports that overall demand had been relatively resilient in July, especially for house building and infrastructure projects.

“Construction firms generally suggested that clients had adopted a wait-and-see approach rather than curtailed or cancelled forthcoming projects during July,” said Moore. “While there is little to suggest an imminent turnaround in business conditions, a relief factor appears to have softened the fall in business optimism among UK construction companies.

“Latest data showed that confidence regarding the year-ahead outlook eased further following the EU referendum, but only to a level last seen in April 2013 and one that is still well above the record lows experienced in 2008/09.”