UK Construction Sector Moves Closer To Stabilisation, August Reveals Latest Markit Report

Despite downturn in the UK construction sector continuing in August, it eased more than expected in the eighth month of the year with employment and confidence levels also improving slightly, new figures reveal.

And although output fell for a third consecutive month, the latest construction PMI from Markit/CIPS shows the industry is moving “closer to stabilisation” with the pace of decline slowing considerably.

The report shows that although the construction PMI remained below the 50.0 no-change threshold, it did increase to 49.2 in August from the record seven-year low of 45.9 in July.

New order volumes also moved closer to stabilisation, with the latest reduction the least marked since May. This contributed to a renewed rise in staffing levels across the construction sector and a rebound in business expectations for the next 12 months.

However, latest data indicated a further steep acceleration in input cost inflation. Purchasing prices rose at the fastest pace for just over five years amid reports that exchange rate depreciation had acted as a catalyst for increased charges among suppliers of construction materials.

Reports from survey respondents suggested that Brexit uncertainty continued to act as a brake on the construction sector during August with commercial building and housing activity both slowing but at a reduced pace than July.

Both sub-sectors recorded the slowest rate of contraction in three months in August, while civil engineering activity stabilised following a reduction during the previous month.

Looking ahead, construction firms pointed to a rebound in business confidence from July’s 39-month low. Although the degree of positive sentiment was the highest since May, it remained close to the weakest recorded over the past three years.

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Tim Moore, senior economist at Markit and author of the Markit/CIPS Construction PMI, said: “The downturn in UK construction activity has eased considerably since July, primarily helped by a much slower decline in commercial building.

“Construction firms cited a nascent recovery in client confidence since the EU referendum result and a relatively steady flow of invitations to tender in August.

“However, the latest survey indicates only a partial move towards stabilisation, rather than a return to business as usual across the construction sector.

“There were still widespread reports that Brexit uncertainty had dampened demand and slowed progress on planned developments, especially in relation to large projects. As a result, total new order volumes continued to fall during August, which stands in contrast to the three-year run of sustained growth seen prior to May 2016.

“Despite another month of reduced output, the latest figures can be viewed as welcome news overall after a challenging summer for the construction sector. The move towards stabilisation chimes with the more upbeat UK manufacturing PMI data for August, and provides hope that the near-term fallout from Brexit uncertainty will prove less severe than feared.”

David Noble, group chief executive officer at the Chartered Institute of Procurement & Supply, said: “Purchasing costs went up at a rate not seen for half a decade, as the impact of the weak pound was felt by the construction sector.

“Firms reduced their purchasing volumes as a result, as new orders and activity continued to fall – though at a more moderate rate compared to last month. Costs for energy and raw materials such as steel and timber were highlighted as company margins were squeezed.

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“Employment levels recovered to a modest degree, though at the second-slowest pace for three years. Some firms reported that they planned to increase staff numbers in hopeful anticipation of a surge in
activity towards the end of the year. Business sentiment was moderately more positive than that seen in the immediate aftermath of the Brexit vote.

“After the shock of last month’s seven-year low in the overall index, the picture now is more about stabilisation than searing growth, as the sector remained in contraction. The housing sector continued its downward slide, but the drop in activity was much softer in August.”

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