Construction Sector Records Fastest Drop in New Orders Since April 2009

Michelle Remo, “Big 4″ observer
September 07, 2012 /

August data pointed to a renewed downturn in UK construction output and another reduction in new order volumes, highlighting an ongoing deterioration in business conditions across the sector.

At 49.0, down from 50.9 in July, the seasonally adjusted Markit/CIPS Construction Purchasing Managers’
Index (PMI) was below the 50.0 no-change mark and the second-lowest since February 2010. The marginal decline in overall output reflected lower levels of business activity in all three broad areas of the construction sector.

Tim Moore, Senior Economist at Markit and author of the Markit/CIPS Construction PMI, said: “A construction decline for 2012 overall is statistically baked in the cake. To bring output for the year as a whole up to the total level seen in 2011 would require a rather implausible doubledigit growth surge in each of the final two quarters. Therefore, an important issue is simply whether a floor has yet been established, and the survey evidence at this stage seems to suggest it hasn’t.

“Indeed, output dropped in August at the secondfastest rate since the snow-affected month of February 2010, with commercial activity even joining the housing and civil engineering sectors in contraction for the first time in two-and-a halfyears.”

Residential building activity was the worst performing category of construction output monitored by the survey in August. Latest data also signalled a solid reduction in civil engineering activity, which extended the current period of contraction to three months.

Meanwhile, commercial construction activity fell for the first time in two-and-a-half years, although the rate of reduction was only marginal.

Anecdotal evidence from survey respondents attributed the drop in construction output to ongoing weak demand across the sector. This was highlighted by a decrease in new order intakes for the third consecutive month during August.

Moreover, the latest fall in new business volumes was the fastest since April 2009. Construction firms cited lower spending patterns among both public and private sector clients in August.

A marked decline in construction workloads meant that construction companies generally had sufficient
staffing levels to meet existing demand. As a result, employment levels stagnated in August, thereby
continuing the trend seen on average throughout the summer. Some firms noted that increased concerns about the business outlook had weighed on their job hiring decisions during the latest survey period.

David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply, said: “Both the decline in commercial activity and the significant drop in new orders are particularly worrying. The commercial sector had previously been propping up the figures and the lack of new contracts suggests things will get worse before they get better.

“Inevitably confidence has also been hit hard, and it has not been recorded as low as it is now, since
last October. For good reason too, as it’s clear that tough times still lie ahead.”

UK construction companies indicated that their business confidence weakened for the fourth time in the past five months during August. The latest reading indicated that the degree of positive sentiment regarding the year-ahead outlook is the lowest since October 2011 and weak in the context of the survey history.

In line with recent trends, subdued business sentiment reflected lower new order intakes and concern about a lack of work to replace completed projects.

Reduced workloads resulted in a further solid decline in purchasing activity across the construction sector, extending the current period of contraction to three months. However, supplier lead-times lengthened again in August, thereby continuing the trend seen throughout the past two years. Survey respondents widely reported that low stocks at suppliers had contributed to delays in the receipt of construction materials.

Meanwhile, latest data signalled a robust and accelerated pace of input price inflation in the construction sector, with the latest rise in cost burdens the fastest since March.


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