UK construction activity continues to contract but at a slower rate
(09/03/2010)

According to the latest CIPS/Markit UK Manufacturing PMI, UK construction activity has continued to fall during February. However, the rate of decline was one of the weakest during the current two-year period of contraction.

The seasonally adjusted CIPS/Markit Construction Purchasing Managers’ Index (PMI®) posted 48.5 during February, which was only fractionally lower than the previous month’s 48.6. This signalled that the rate of contraction was broadly unchanged since January. Lower activity generally reflected a further marginal decline in new orders.

Of the three broad UK construction sub-sectors, house building was the only one to show a rise in activity. Residential construction has improved in each of the past six months, demonstrating a faster return to recovery than the other UK construction sectors. In contrast, civil engineering based work contracted at the fastest pace of the three subsectors in February. The reduction in commercial construction activity was modest, and the weakest in six months.

Incoming new orders received by construction companies fell for a third successive month in February, although at only a marginal pace. Opportunities to tender remained limited, reflecting the fragility of the current economic recovery. However, poor weather conditions and difficulties funding construction work also negatively impacted upon new business.

Reflecting the further decrease in new orders and activity, purchasing activity fell, extending the period of sustained decline to two years. However, the extent to which purchase volumes reduced was the weakest in that period. Suppliers’ delivery times improved for a twenty-second successive month, led by the further reduction in purchasing activity.

In contrast to the previous survey period, input costs were reported to have risen. The latest increase was the fourth during the past five months. However, the rate at which costs rose was modest, and substantially below the long-run series average.

Employment in the UK construction industry continued to fall sharply. The latest decrease in staffing levels was faster than that reported in January. Alongside capacity adjustments, anecdotal evidence suggested that construction companies were working on contracts which utilised fewer staff. There were also reports that customers’ funding constraints for projects had led to further job cuts.

Meanwhile, expectations for activity levels in the next twelve months continued to rise. Many panellists believed that the ongoing recovery in general economic conditions would boost the amount of opportunities to tender.

David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply, said: “While the UK economy slowly pulls into recovery mode, the construction sector has now been confined in recession territory for two years and is still very fragile. Though this was a relatively modest rate of contraction, tough operating conditions, dire weather and funding constraints dampened overall sector activity.

“Employment levels took another knock as contractors tried to keep overheads to a minimum. Even in the face of new contracts, firms made a conscious effort to utilise as few staff as possible to cope with the continuing barrage of bad news.

“Interestingly, widespread concerns that the general election fallout will result in significant spending cuts failed to dent future market expectations. Such a positive outlook, however, may only serve as a reflection of how difficult conditions currently are, rather than painting a picture of how good they will be in the future.”

Sarah Ledger, Economist at Markit said: “The recovery of the wider UK economy is yet to filter through to the construction sector, with February PMI data showing a sustained decline in activity levels over a two-year period. New opportunities to tender remained limited, compounded by funding constraints for new projects. Poor weather conditions also had a detrimental effect on the sector during the month. However, growth in residential construction was recorded for a sixth successive period.

“Construction companies remained optimistic over future activity for the next twelve months. Nonetheless, potential cuts in public spending could negatively impact sector performance, suggesting that fragility will be a key theme over the coming months.”

The March Report on Construction will be published on Friday 2nd April 2010 at 9.30am.