Construction Sector Optimism Slumps To 6 Year Low

UK construction work fell for the sixth consecutive month, slumping to the lowest output levels since the financial crisis in 2009. 

According to respondents of the IHS Markit/CIPS UK Construction Total Activity Index, optimism for the year ahead has reached its weakest levels since 2012. 

Although the IHS Markit/CIPS UK Construction Total Activity Index level has risen marginally since June’s decade low output figure of 43.1, October’s index rating of 44.2 is still a long way short of the output neutral index figure of 50, suggesting the construction market is contracting considerably. 

Reductions in output has now permeated into all areas of UK construction. Residential output has fallen to its lowest levels in over three years, commercial work output fell for the tenth consecutive month and civil engineering business activity fell at the fastest pace since 2009. 

Orders for new construction work also fell for the seventh month in a row but decreased at the lowest rate since July as investors continued to defer the green light on new projects until current political uncertainty is resolved. 

According to the respondents of the survey, competition for new construction projects was now at an intense and unhealthy level, resulting in a race to the bottom as firm’s offer discounted prices to secure the contracts. 

The overall market difficulties have therefore forced construction companies to reduce their workforce numbers once again in October and a downturn in vendor performance is also resulting in stock shortages.    

Tim Moore, Economics Associate Director at IHS Markit, which compiles the survey 

“UK construction companies experienced a downturn in business performance during October as political uncertainty and subdued economic conditions again combined to hold back sales. New orders have fallen in each month since April, which is the most prolonged period of decline recorded for more than six years.  

“Civil engineering was the worst-performing area of activity in October, with business activity dropping at the fastest pace in ten years. Construction companies also voiced concerns about the uncertain outlook for large-scale infrastructure projects upon which growth is expected to rest in the coming years. 

 “House building has also lost momentum this autumn amid a broader slowdown in market conditions, with the latest survey data signalling the sharpest drop in residential work since June 2016.  

“There are clear signs that construction firms are positioning for an extended soft patch for project starts, as highlighted by a further decline in purchasing volumes and another month of cuts to workforce numbers through the non-replacement of voluntary leavers.”  

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply: 

 “The construction sector’s distressing decline continued in October in spite of a small improvement in the headline index as a resolution to the political impasse seemed close. However, with a fall in civil engineering not seen for a decade and the biggest drop in house building since 2016, it appears that strength in the sector is seeping away.  

“Jobs hiring suffered as businesses unsure of the Government’s next steps held back on their development plans, which were weakened further by stronger competition for fewer opportunities. Future optimism remained at 2012 levels as the deep-seated Brexit gloom dampened down expectations.  

“To say these figures are disappointing is a big understatement. Given that the next political hurdle is December’s General Election, all eyes will be on the new administration and clear direction, because at the moment there is little insight into what could possibly pull the sector out of its ditch.” 

How concerning are these figures for the construction market and property market? 

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