Construction PMI shows activity contracting for first time in 13 months - EY ITEM Club comments

03 October 2017

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  • A disappointing survey, which adds to evidence that the construction sector had a very difficult third quarter. Indeed, it looks highly probable that construction output contracted in Q3 and was a drag on GDP growth, although the sector only accounts for 6.1% of total output
  • Following on from a softer manufacturing survey for September, the weak construction survey fuels concern that an already lacklustre UK economy could be faltering. Much attention will now be focused on the September services PMI that comes out on Wednesday
  • The survey shows construction activity contracting for the first time in 13 months hampered by heightened economic and political uncertainty fueling client caution towards major construction projects. Increased input costs are adding to the woes of construction companies
  • September’s third successive contraction in new orders bodes ill for construction activity in the near term at least
  • Furthermore, there is the possibility that house building activity could be pressurized by extended lacklustre housing market activity and subdued prices amid weakened consumer fundamentals

Howard Archer, Chief Economic Advisor to the EY ITEM Club, comments:

“A hugely disappointing survey that fuels suspicion that the construction sector likely contracted again in the third quarter after output declined 0.5% quarter-on-quarter in the second quarter.

“The Markit/CIPS purchasing managers’ survey shows construction activity lost momentum for a fourth month running in September to register its first contraction since August 2016.

“Specifically, the headline index fell back to a 14-month low of 48.1 in September from 51.1 in August, 51.9 in July, 54.8 in June and a 17-month high of 56.0 in May.  This points to only marginal expansion given a reading of 50.0 indicates flat activity.

“The overall marked loss of momentum in construction activity in recent months points to heightened economic, political and Brexit uncertainties fuelling clients’ caution over committing to new projects

September construction survey disappointing across the board

“The weakness in construction activity was widespread in September with civil engineering activity contracting at the fastest rate since April 2013 and commercial activity contracting at the fastest rate since July 2016. Housebuilding continued to grow but at the slowest pace since March.

“Boding ill for future construction activity, new orders contracted in September for a third month running. This was reported to be the consequence of reduced business investment amid increased uncertainty. Civil engineering work was reported to be suffering from a lack of new infrastructure projects.

“Construction companies’ confidence in the outlook weakened markedly in September to be at the second lowest level since April 2013.

“With activity and new orders contracting, employment in the construction sector grew only slightly in September.

Rise in input costs

“Further bad news for construction companies saw input costs rise at the fastest rate for 7 months in September. A substantial amount of building components and materials are imported and costs have been pushed up by the weak pound.

“The rise in construction companies’ input costs will also likely be noted by the Bank of England.

Construction output looks likely to have contracted again in third quarter

“It looks highly probable that construction output contracted in Q3 and was a drag on GDP growth, although the sector only accounts for 6.1% of total output.

“Latest hard data from the ONS shows that construction output fell 0.9% month-on-month in July, which was a fourth successive decline. Consequently, construction output was down 1.2% in the three months to July compared to the three months to April. Furthermore, construction orders fell 7.8% quarter-on-quarter in the second quarter to be at the lowest level since the first quarter of 2014.”

Outlook for construction

“Muted economic activity and appreciable economic and political uncertainties threaten to be a highly challenging combination for the construction sector over the coming months.

“Furthermore, despite the improvement in housebuilding activity in August, there is a possibility that house building activity could be pressurized by extended lacklustre housing market activity and subdued prices amid weakened consumer fundamentals.  

“There is the particular concern that potential clients will be cautious over committing to major projects if economic, political and Brexit uncertainties remain elevated over the coming months.

“Construction companies will be hoping that recent government measures aimed at boosting infrastructure and housebuilding have a material beneficial impact.”

ENDS