UK construction sector optimism falls to six year low

UK construction firms reported increased activity last month but industry optimism fell to a six-year low, from 54.9, a survey from IHS Market revealed on Friday.

The UK construction purchasing managers' index for October rose from 52.1 to 53.2, its second-highest level in the last 16 months and beating an expected fall to 52.0.

A rebound in civil engineering activity was behind the sector's gains, after declines in both August and September.

Growth in both residential and commercial building activity softened, the weakest in seven and five months respectively.

Optimism among firms over 12-month growth prospects was the lowest in nearly six years amid minimal growth in new projects and the slowest rate of new contract growth in the past five months.

The survey found construction cost pressures remained strong, with fuel, labour, timber and steel costs all reported higher, while sub-contractor rates also climbed.

“Although total UK construction activity rose at a stronger pace in October, the underlying survey data paint a less rosy picture for the sector towards the end of the year," said Trevor Balchin, economics director at IHS Markit.

He said the growing pessimism was being linked by companies to uncertainty around Brexit negotiations, which is influencing delays to final decisions at clients.

Economist Samuel Tombs at Pantheon Macroeconomics said October's PMI reading was, on past form, consistent with quarter-on-quarter growth in construction output of about 0.2%, though activity looks set to deteriorate over the coming months.

"Further ahead, the construction sector has the potential to enjoy a solid recovery when business confidence revives," Tombs said, with the Chancellor's recent Budget incorporating plans for a hefty 10.4% increase in public sector gross investment in 2019/20.

"In addition, the Chancellor’s decision to extend the Help to Buy Equity Loan Scheme for two more years beyond April 2021 should support the pipeline of housebuilding over the next year. But builders will have to endure a tough Q4 and Q1 first, as firms hold back from making investments until Britain’s Brexit path is known."