Marginal Rise in UK Construction Output, but New Orders Continue to Decline in July

Kimberly Watson, Editor in Chief
August 03, 2012 /

The growth in UK construction sector was largely confined to the commercial subsector in July, as house building and civil engineering activity continued to decline.

The latest reduction in civil engineering was the secondfastest since September 2011. July data indicated a further reduction in new work received by construction companies. Although the rate of decline eased over the month, it was still the second-fastest since January 2010.

But KPMG says the positive headline for construction output lacks firm foundations.

Richard Threlfall, KPMG’s head of infrastructure, building and construction, said: “No-one should be fooled by the marginal rise in construction output into thinking the industry is heading back into growth.

“The pressure on the construction sector remains acute and it is in need of urgent support. The Government’s announcement of guarantees for up to £40bn of projects is welcome, but investment is needed sooner rather than later. Support for house-building is particularly urgently required.”

Survey respondents widely cited a lack of new opportunities to tender and a general weakness in underlying market demand.

UK construction companies reported a second consecutive monthly reduction in purchasing activity at their units. The rate of reduction in input buying was only moderate, albeit the secondfastest since November 2010. Anecdotal evidence
linked the latest decline to falling volumes of new work and, in some cases, efforts to streamline stocks.

Suppliers’ delivery times meanwhile lengthened sharply in July, which some respondents attributed to delayed deliveries around London in the run-up
to the Olympics. The latest overall deterioration in vendor performance was the most marked since February 2011. Moreover, longer supplier leadtimes have now been recorded for almost two years in a row.

Input prices increased in July, thereby extending the current period of cost inflation to two-and-a-half years. However, the latest increase was relatively
subdued and slower than the long-run series average. Construction companies noted that higher energy and fuel costs were the main reasons for rising input prices during July.

Meanwhile, rates charged by sub-contractors declined for the fourth month running and at the fastest pace since June 2011. Sub-contractor availability increased at the slowest rate since November 2007.

Latest data showed that more than twice as many construction firms anticipate an increase in business activity over the year ahead as those that forecast a decline. As a result, survey respondents remain optimistic overall that output will rise in 12 months’ time, and the degree of positive sentiment was the strongest since April.

Anecdotal evidence cited a gradual rebound in output, boosted by the resumption of delayed projects. Confidence about the outlook for activity helped support a marginal rise in employment in July, which was the fourth increase in the past five months.

Tim Moore, Senior Economist at Markit said: “July’s survey offered little sign of an imminent rebound in the UK construction sector, with total activity rising only marginally after well documented temporary factors had weighed on output last month.

“Another drop in new orders, alongside wet weather conditions, meant a soft platform from which construction output could bounce in July. The pace of new order decline was one of the fastest seen in the past three years, and consequently there was just a meagre post-Jubilee expansion of activity levels.

“However, the survey shows that some construction firms are expecting, or at least hoping, that the sector will receive a shot in the arm during the next
12 months. A slow and gradual recovery remains most firms’ base scenario, with some anticipating a boost from deferred projects going ahead later in the year. This in turn pushed business sentiment up from June’s recent low and supported employment trends across the industry in July.”

David Noble, Chief Executive Officer at the Chartered Institute of
Purchasing & Supply, said: “Last month’s construction performance was so
bad, that this month there was hope for a positive turnaround. There was some progress, with a slight boost in performance, but the external operating
environment remains depressed. While the modest growth in July has been driven by the commercial sector, housing and civil engineering continue to

“Worryingly, the sharp drop in new business means there is little chance of the sector rebounding quickly. However optimism remains, with increased
employment and retention of sub-contractors. Whilst this is encouraging, the relative stability of construction employment is partly a reflection of just
how steep the job cuts were in the lead-up to the double-dip.

“Firms were hoping for a post-Olympics fillip; based on today’s figures, the overall likelihood of that happening has dwindled.”


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