UK construction activity drops off and costs rise in September
UK construction activity declined for first time in 13 months in September, according to a closely followed survey of the industry that indicated "fragile" client confidence and a lack of new infrastructure projects was hitting new business volumes.
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The UK Markit/CIPS construction purchasing managers' index for September fell to 48.1 from the previous month's 51.1, with the consensus forecast expecting a smaller drop to 50.8.
Following on from a softer manufacturing survey announced a day earlier, the weak construction data points to a continuation of lacklustre UK economic growth.
Construction activity is now expected to be lower for the third-quarter as a whole, economists said, with recent PMI surveys indicating that the 0.5% quarter-on-quarter fall in the official measure of construction output in the second quarter will be repeated.
The survey found civil engineering activity fell by the sharpest amount since April 2013, with the index dropping to 45.7 from 50.2, as some firms cited a lack of new infrastructure projects to replace completed contracts, which alongside weaker commercial activity led to lower overall volumes of construction work.
House building was the only segment of the industry to expand in September, but growth momentum eased to a six-month low, with the index falling to 53.1 from 56.4 in August amid a backdrop of rising mortgage rates and low consumer confidence that appears to be resulting in a dampening of new buyer demand.
New business volumes dropped for the third month running and construction firms' expectations for growth in the next 12 months fell to the second-lowest level since April 2013.
Markit said construction companies continued to face headwinds from rising input costs, with higher prices for imported materials helping to drive up inflationary pressures to a seven-month high, aided by supply bottlenecks.
FRAGILE CONFIDENCE AND WEAK GROWTH EXPECTATIONS
“A shortfall of new work to replace completed projects has started to weigh heavily on the UK construction sector," said Tim Moore, associate director at IHS Markit.
"Aside from the soft patch linked to spending delays around the EU referendum, construction companies have now experienced their longest period of falling workloads since early-2013.
“Fragile client confidence and reduced tender opportunities meant that growth expectations across the UK construction sector are also among the weakest for four-and-a-half years."
Economist Sam Tombs at Pantheon Macroeconomics said the construction sector "is entering its own recession as Brexit risk dampens demand for commercial buildings and as housing demand cools", with the average level of the PMI in the third quarter of 50.4 consistent with another 0.5% fall in the sector's output in the quarter.
"Steeper declines in construction output likely lie ahead, given that official data show that new orders fell by 7.8% quarter-on-quarter in Q2, the biggest drop for five years," Tombs said, adding that lower business optimism suggested that the government’s shift to a more accommodating stance in Brexit talks "has done little to convince builders that clients will sanction delayed projects soon".
This was a "hugely disappointing" survey, said economist Howard Archer of the EY ITEM Club, agreeing that the construction sector is likely to have contracted again in the third quarter to exert a small drag on GDP as the sector only accounts for 6.1% of total UK 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," he said.