UK construction sector continues to falter as no-deal Brexit looms

The downturn in the UK's construction sector worsened in September, a survey showed on Wednesday, as Brexit uncertainty and the weak economic outlook saw clients delay investment decisions.

The IHS Markit CIPS UK Construction Total Activity Index was 43.3 in September, down on the 45.0 recorded in August and the second-strongest deterioration since April 2009. Economists had been expecting no change.

Anything below 50.0 is a contraction, anything above it records growth.

Respondents recorded a historically steep drop in new orders, while employment was trimmed at the fastest rate since the end of 2010.

Commercial activity continued to the be the worst-performing segment, with the contraction gathering pace to reach 41.0. Civil engineering activity also dropped off sharply, however, at 41.3, and there was a fourth-successive monthly decrease in residential building, to 47.7.

Joe Hayes, economist at IHS Markit, said: “The UK construction sector remained mired in a downturn at the end of the third quarter. Activity is being pulled down at its second-fastest clip for over a decade, as firms are buffeted by client hesitancy, heightened Brexit uncertainty and a weak outlook for the UK economy.

“The commercial sector was a notable casualty in September, with building activity here falling at the fastest rate since April 2009, highlighting the damaging effects of project delays and belt-tightening.

“Overall, the performance of the UK economy once again hinges on the services sector showing a market degree of resilience to offset the weaknesses seen in construction and manufacturing.”

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: “Looking ahead, the signs do not look positive. Even a moderation in input prices since March 2019 and some moderate improvement in supply chain pressures will not be enough to keep the wolf from the door, as no-deal looms and businesses remain Brexit unsteady.”

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the risk of a no-deal Brexit remained the biggest pressure on the sector, adding: “The PMI is consistent with construction output falling by about 2.0% in the third quarter, building on the second quarter’s 1.2% decline.”

Nonetheless, he argued: “The construction sector could revive quickly if the risk of a no-deal Brexit subsides; the corporate sector has ample cash reserves waiting to be deployed.

“In addition, new work in the housing sector should start to pick up again in response to the decline in new mortgage rates, which will shore up housing demand. And whichever party wins the upcoming general election, fiscal policy looks set to be loosened next year, with capital expenditure likely increasing at a solid rate.

“Accordingly, a construction sector recovery in 2020 is in sight.”

Gareth Belsham, director of surveyors Naismiths, said: “Falling demand from investors and brutal, margin-slashing competition among contractors have [dented] confidence. Many contractors are being squeezed by rising input costs just as new orders fall sharply.

“There is only so long moth-balled projects and deferred investment decisions can be held back; the priority for the industry is to ride out the storm and retain enough capability to cope with the day that demand snaps back."

The IHS Markit/CIPS panel of around 150 construction firms was surveyed between 12 and 27 September.