Reduction in construction activity quickens despite only negligible fall in new orders
(19/10/2009)

CIPS/Markit UK Construction PMI's September survey data signalled a fractional decline in new order levels, although this was unable to prevent a further solid fall in activity. Employment and purchasing volumes were reduced markedly, while competition amongst vendors led to another fall in input costs. Confidence over future activity remained strong.

The seasonally adjusted CIPS/Markit Construction Purchasing Managers’ Index® (PMI®) posted a reading of 46.7 in September, indicating a further fall in UK construction sector activity, and the fastest reduction since June. The commercial and civil engineering sub-sectors continued to report reductions in output, with rates of decline accelerating since August. However, the housing sub-sector posted a rise in activity, albeit marginal, for the first time in twenty-two months.

Incoming new business fell at its slowest rate of contraction in the current nineteen-month period of decline during September, posting only a negligible reduction. Where new orders fell, companies attributed the decline to competitive pricing by rival constructors and ongoing budget constraints at clients.

Reflective of the ongoing spare capacity and low workloads, employment levels decreased further. Moreover, the rate of decline in staffing numbers increased since August to the steepest in three months. Jobs have now been lost in every survey period since June 2008. Similarly, sub-contractor usage posted a further reduction in September, extending the period of sustained decline to twenty-two months.

In line with lower activity levels, purchasing activity continued to contract, although at a broadly unchanged rate of decline compared to August. Reflective of reduced buying volumes, suppliers’ delivery times quickened further during September.

Accentuating this, vendors improved lead times for constructors in an attempt to win business. Also indicative of difficult market conditions was the sustained fall in input prices. Costs were reduced solidly during September, as vendors competed for fewer orders.

UK construction companies indicated positive expectations for business activity in twelve months’ time. Anticipated improvements in future economic conditions boosted confidence amongst panellists. Whilst some companies were optimistic with regards to marketing campaigns, others noted expectations for higher future order volumes.

Commenting on the report, David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply, said: ”The UK construction sector continued to be heavily impacted by the recession as it deteriorated at its fastest rate since June. Though the industry is not contracting as quickly as it was earlier in the year, firms are struggling to adjust to comparatively low levels of activity, as reflected by employment levels which took another hefty hit and have dropped consecutively for sixteen months.

“One of the few glimmers of hope appeared in the housing sub-sector which registered a marginal rise in activity for the first time in twenty-two months. Moreover, as commercial and civil engineering showed further signs of decline, this collectively highlights the volatility of the UK construction industry.”

Sarah Ledger, Economist at Markit said: “While the contraction in UK construction sector activity accelerated marginally during September, the average pace of reduction recorded during Q3 2009 was the slowest over a quarter since growth was last recorded in Q1 2008. The steep easing in the rate of decline experienced between February 2009, the series record, and June has languished somewhat over the last three months. However, given the depth of the economic downturn experienced in the UK, this likely reflects continued adjustment to lower order volumes and ongoing spare capacity. Employment therefore fell further during the month, with this expected to continue in the near term.

“Encouragingly, the residential construction sector recorded growth in activity for the first time in twenty-two months and overall incoming new contracts received by the UK construction sector fell only fractionally. Therefore, while a positive contribution to GDP would seem unlikely for Q3, an improvement may be seen after this.”