UK Construction Sector Slump Shows Economic Uncertainty Continues

The UK construction sector sharply contracted in September on weak new work, data from IHS Markit showed Tuesday.

The IHS Markit/Chartered Institute of Procurement & Supply construction Purchasing Managers’ Index fell to 48.1 in September from 51.1 in August. The reading was expected to remain unchanged at 51.1, Business Insider reported.

The score was below the 50-change threshold for the first time in 13 months. The latest reading signaled the fastest decline in overall construction output since July 2016.

“A dismal picture of construction emerged this month as the sector showed signs of worsening business conditions across the board,” Duncan Brock, director of customer relationships at the Chartered Institute of Procurement & Supply, said.

“With the biggest contraction in overall activity since July 2016, and a drop in new orders, optimism was in short supply,” he added.

House-building is the only area of growth and even that slowed down last month, according to a survey of the industry published by IHS Markit.

Businesses are commissioning fewer new commercial developments with builders reporting a sharp decline in work in the market.

“This reading is significantly worse than expected and shows that economic uncertainty continues to have a serious impact on the construction industry. Construction is an economic bellwether, so the concern will spread well beyond the sector,” said Richard Threlfall, head of infrastructure, building and construction at KPMG.

“There is a clear downturn in commercial construction, which is likely to continue. This is because new orders are dropping off, hitting pipelines.”

Civil engineering work fell at its fastest pace in more than four years as completed projects are not replaced with new jobs. Both the commercial and civil indices fell to 45.7 in September, while housing slowed to 53.1, its lowest level in six months.

“The construction sector is entering its own recession, as Brexit risk dampens demand for commercial buildings and as housing demand cools,” said Samuel Tombs at Pantheon Macroeconomics.

Official figures showed the construction sector contracted by 0.5% in the second quarter of the year and Tombs expects another decline in the third quarter, putting the industry into official recession territory.

Construction accounts for only a small proportion of GDP, however, at around 6%.

 “Concern regarding demand for high-profile office space from the financial sector has led to a lack of new projects to replace the existing projects as they finish,” said Noble Francis, economics director at the Construction Products Association.

But the slowdown in new commercial building was combined with falling volumes of infrastructure work, as new projects announced by the government have not yet been launched.