Activity in the UK construction sector continued to fall in November
(07/12/2009)

According to the November CIPS Construction survey, activity in the UK construction sector continued to fall in November, despite a modest rise in incoming new orders. However, the rate of contraction in activity eased to its slowest since August. Meanwhile, employment continued to fall sharply, although optimism over future business conditions was again recorded.

The seasonally adjusted CIPS/Markit Construction Purchasing Managers’ Index (PMI®) posted a reading of 47.0 in November, signalling a further fall in UK construction sector activity. Although the pace of decline eased marginally since October, November marked the twenty-first successive monthly contraction in activity within the UK construction sector.

The commercial and civil engineering subsectors reported further declines in activity during November. Conversely, residential construction activity expanded for the third successive month, with November’s rate of growth solid and the highest in over two years.

Incoming new business received by construction companies in the UK increased marginally during November. This was the first time in twenty-one months that a rise in new order volumes had been reported, with companies signalling that targeted marketing and the completion of contract negotiations had supported growth.

Purchasing activity decreased during November. However, the rate of reduction was modest and the slowest in twenty-one months. Falling activity resulted in the latest decline in buying volumes, although the improvement in new orders received during the month prevented a sharper decrease.

Suppliers’ delivery times shortened in November, reflective of lower purchasing activity by UK construction companies. However, the rate at which lead times improved eased to the weakest in sixteen months, as the contraction in purchasing volumes slowed.

Excess capacity within the UK construction industry was again evident in November. With activity remaining well below pre-recession levels, employment declined sharply, extending the sequence of sustained reduction to eighteen months.

Similarly, sub-contractor usage fell further, albeit at a slower rate. Construction companies reported a second successive increase in input prices during November. Rising fuel costs were particularly noted to have driven input prices higher.

Optimism over future business conditions in twelve months’ time was signalled during November. Panellists reported that the anticipated recovery in economic conditions is expected to result in improved workloads.

RICS chief economist Simon Rubinsohn, says: "The results of the November CIPS Construction survey broadly chime with the most recent RICS survey of the sector. In both cases, the results suggest that the construction industry remains firmly locked in recession with workloads continuing to slip. Significantly, however, both reports also indicate a greater layer of optimism about the outlook with workloads expected to edge upwards over the next twelve months. Some of the better news flow is emanating from the residential sector where new home starts are beginning to pick up albeit from depressed levels. Nevertheless, a key issue will be the extent to which the scaling back of projects in the public sector, as fiscal policy is tightened over the next few years, offsets any tentative recovery in private development. The likelihood is that this will mean that any pick-up in activity in the construction sector will be very gradual. "

David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply, said: “There is little festive cheer for the UK construction industry which still remains very vulnerable. Despite a slight boost in volumes of new business, construction firms are still feeling the effects of the worst economic landscape seen in over a decade. Twenty-one months of continued decline has hit the industry incredibly hard - as highlighted by another round of job cuts this month.

“One positive is that the sector is not contracting as sharply as it was this time last year and purchasing managers are remaining upbeat about future business conditions. A broader economic recovery will improve the sector’s outlook. However, it appears we are still some way off from returning to growth let alone reaching the level it was at only two years ago.”

Sarah Ledger, Economist at Markit said: “November PMI data signalled the first rise in new business received by UK construction companies since February 2008. However, this did little to boost activity levels in the sector, given the low base from which the new order improvement originated. A further sharp rate of job cuts highlighted the continued difficult business conditions experienced within the construction industry.

“Positive sentiment over future business conditions remained evident in November, with an eventual recovery in the construction sector most likely to emanate from an overall improvement in the UK economy.”