Sharp drop in construction output

Published:  05 July, 2012

UK: Output and new construction orders both fell in June, employment in the sector also declined for the first time in four months. 

UK construction companies signalled a reduction in business activity at the end of the second quarter, according to the seasonally adjusted Markit/CIPS Construction Purchasing Managers' Index (PMI). The survey highlighted the fastest rate of contraction for two-and-a-half years.

The fall in the index over the month was also the greatest since February 2009, said Markit, and signaled a marked loss of momentum following the solid expansion seen in the previous survey period. What happened?

Anecdotal evidence attributed part of the decline to the extra Bank Holiday in June, and to uncertainties about the economic outlook but the survey's panellists also widely commented on weaker underlying business conditions.

Civil engineering and housing activity were the worst performing broad areas of the construction sector, with both seeing a drop in output for the first time since the weather-affected downturn in January.

Commercial activity only increased marginally, and at the slowest pace for 28 months. 

Sub-contractor usage also declined in June, and at the sharpest pace since August 2011.

Input buying in the construction sector decreased during June for the first time in a year-and-a-half, although the rate of reduction was relatively modest. Lower levels of purchasing activity were widely linked to weaker new order inflows in June.

Meanwhile, supplier delivery times have lengthened since May, with the latest deterioration in vendor performance the most marked in 14 months. Construction companies attributed  this to low supplier stocks.

Construction firms expect an increase in business activity at their units over the next 12 months. That said, the degree of positive sentiment remained well below the long-run survey average, and the latest reading was the lowest since October 2011.

Tim Moore, senior economist at Markit and author of the Markit/CIPS Construction PMI, said: "The UK construction sector moved into reverse gear in June, with output falling at its fastest pace since the end of 2009 amid a steep decline in civil engineering. A drop in business activity was perhaps inevitable given that the month started with an additional Bank Holiday and ended with severe weather across large parts of the UK". 

Mr Moore went on to state that "these temporary factors should not be overplayed, as the latest figures reveal worsening underlying business conditions within the sector.

"Construction firms' assessment of future output dropped to an eight-month low in June, whereas past disruptions, such as heavy snowfall at the start of 2012 and the Royal Wedding, boosted future expectations as companies anticipated that a catch-up effect would follow. 

"New business intakes meanwhile dropped at the fastest pace since April 2009, while a lack of work to replace completed projects resulted in falling employment after a three-month period of cautious job hiring."

According to David Noble, chief executive officer at the Chartered Institute of Purchasing & Supply, the report illustrated that "the renewed declines in construction output and employment are a reflection of the weakening trend in new orders seen in recent months.

"The contraction was accompanied by a similar fall in cost inflation, but this is scant consolation for businesses, as the global economy continues to cast a shadow over the industry.

"Sharp drops in new civil engineering and housing activity were almost matched by the slowdown in commercial activity. The anomaly of the double Bank Holiday at the start of the month will have had some negative impact but the underlying sluggishness throughout the industry could point towards a much softer period heading into the third quarter."

He added that there was concern by the survey's respondents  about the ability of firms to respond quickly to any rise in new orders. "Delivery times for inputs lengthened again in June due to the low stocks reportedly being held by suppliers, highlighting a further worry for the health of the sector."

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