CIPS News


UK construction output falls again in July, but new orders decrease at slower pace

CIPS 2 August 2016

July data signalled a further downturn in UK construction output, but 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 inthe 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.

Markit/CIPS UK Construction PMI®

- Fastest overall drop in output since June 2009

- All three sub-categories record lower output, led by commercial activity

- New orders fall at slower pace than in June

July data signalled a further downturn in UK construction output, but 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 inthe 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.

The seasonally adjusted Markit/CIPS UK Construction Purchasing Managers’ Index® (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. This largely reflected the steepest fall in commercial building for over six-and-a-half years, alongside a drop in civil engineering activity for the first time in 2016. 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. Survey respondents noted that uncertainty following the EU referendum had dampened client confidence, led to greater risk aversion, and encouraged a wait-and-see approach to decision making. That said, 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.

Insufficient new work to replace completed projects resulted in a decline in employment numbers for the first time since May 2013. Survey respondents mostly cited the non-replacement of voluntary leavers. Moreover, there was a sharp reversal in sub-contractor availability, which rose at the fastest pace since September 2012. Weaker demand for sub-contractors also contributed to the slowest rise in their average charges for over three years. Materials prices meanwhile increased at the steepest rate since March 2015, despite lower demand for inputs. This was overwhelmingly linked to the weaker sterling exchange rate. Meanwhile, the latest survey signalled a fall in confidence regarding the year-ahead business outlook to its lowest since April 2013.

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

“Material costs were driven upwards at the fastest pace since March 2015, with the weaker pound largely to blame, and some firms reported lower stock levels to maintain cash flow. Job falls were in evidence, but more as a result of a close watch on margins and natural shedding than a shrinking of operations.

“With a reduction in new work for the third month in succession and one of the fastest falls since early 2013, this hesitancy to commit was largely attributed to the continued hazy gloom of uncertainty as clients became more cautious, and deferred orders. The picture is still unclear around whether this direction is fixed for the coming months or is a short-term reaction and the aftershock of the UK’s referendum decision.”

For data and economic queries, please call:

IHS Markit
Joanna Vickers
Tel: +44 207 260 2234
Email: joanna.vickers@ihsmarkit.com

For industry comments, please call:

CIPS
Trudy Salandiak
Tel: +44 1780 761576
Email: trudy.salandiak@cips.org

 Fastest overall drop in output since June 2009
 All three sub-categories record lower output, led
by commercial activity
 New orders fall at slower pace than in June

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