News Article

Sector Analysis

The UK construction economy contracted again in September, and at a faster pace than in August

By CreditMan Friday, October 3, 2008

The UK construction economy contracted again in September, and at a faster pace than in August. Sharper falls in housing activity, commercial activity, new orders, employment, sub-contractor usage, and purchasing activity were all recorded during the latest survey period.

The headline figure from the report, the seasonally adjusted CIPS/Markit UK Construction Purchasing Managers’ Index® (PMI®) – an indicator designed to provide a single figure measure of the trends in construction sector output – registered 38.8 in September, from 40.5 in August, signalling a rapid monthly deterioration in industry activity.

Activity levels again fell across all three sub-sectors of the UK construction economy in September. Rates of decline picked up in both housing and commercial sub-sectors, reaching a series record in the latter. In contrast, the speed of contraction slowed for the second consecutive month in the civil engineering sub-sector to only a marginal pace. The seasonally adjusted Housing and Commercial Activity Indexes registered 26.1 and 36.4, respectively.

The latest, and steeper, decline in total UK construction activity was linked by most survey participants to the ongoing financial crisis and poor global economic conditions. Competition to secure contracts intensified during the latest survey period, resulting in more unsuccessful tenders and smaller order books at many survey panellists’ firms. At 41.2, the seasonally adjusted New Orders Index posted its second lowest reading in the survey history and was indicative of a substantial contraction.

With activity levels falling, construction firms reduced their buying activity, staffing levels, and sub-contractor usage at the quickest rates since the survey began in April 1997. The latest seasonally adjusted Employment Index registered a reading of 42.3, reflecting a noticeably accelerated pace of job shedding.

As a result of lower demand for inputs and efforts by constructors to streamline stocks, average vendor performance improved again in September. Meanwhile, a fall in their usage, plus a steep rise in availability, led sub-contractors to lower their rates for the first time in five years.

Input price inflation persisted at an elevated level in September, despite easing further from June’s peak, as highlighted by a drop in the seasonally adjusted Input Prices Index to 69.5..Respondents explained that the latest cost increases were due to higher raw material prices, particularly those charged for energy.

The continued global economic and financial problems, falling activity and new order levels, plus strong input price inflation, left expectations within the UK construction economy understandably subdued. Confidence regarding activity levels over the coming year fell to its lowest level in the series history during September, as a number of firms predicted growth as contraction. The Future Business Activity Index posted a reading of 50.9, with almost as many firms anticipating a drop in output (31.9%) as predicting a rise (33.7%).

Commenting on the UK Construction PMI® survey, Roy Ayliffe, Director of Professional Practice at the Chartered Institute of Purchasing and Supply, said:

“As the volatility of the world’s financial markets reached fever pitch in September, purchasing managers reported a fall in activity levels throughout the UK construction economy, as companies laid off staff at a considerable pace and sharply reduced buying activity. Fierce competition for new contracts persisted and intensified, resulting in yet more fruitless tenders and diminishing order books.

“Housing again took a battering and was joined by the commercial sub-sector in terms of bleak performance. In the face of myriad obstacles, including rocketing energy prices, UK constructors were dejected and their confidence about the future performance of the sector hit a record low.”

Commenting on the UK Construction PMI® survey, Gemma Wallace, Economist at Markit said:

"There can be little doubt that the UK construction economy is now mired in a recession, and one that is likely to prove difficult to recover from. Although there were promising signs in August of an end to the downward trend in the key indexes, September figures showed a renewed slide. Total industry activity and orders have now fallen for seven straight months, leading to a record contraction of employment in September. That said, there remains some hope of a recovery in the civil engineering sector where the rate of decline in activity levels slowed again, and to just a marginal pace."