Commercial sector contracts as overall growth slows for construction industry

The commercial construction market is shrinking, according to the latest Markit/CIPS Purchasing Managers Index (PMI).

The survey of construction buyers returned a commercial sector index reading below the crucial 50 mark -– where 50 separates expansion from contraction - meaning work volumes are contracting.

Apart from last year’s post EU referendum dip, it is the first time commercial activity has shrunk since 2013.

Overall, the construction industry saw growth contract from 54.8 in June to 51.9 in July.

The reduction in commercial activity was the fastest for 12 months with a number of survey respondents citing delays in decision making by clients and a greater reluctance to commit to new projects, linked to worries about the economic outlook and heightened political uncertainty.

Residential building remained the strongest performing sector in July, although the latest rise was the slowest for three months. The only upturn in output growth was recorded in the civil engineering sector.

Last month also saw an overall reduction in new business work volumes for the first time since the post referendum rebound began in September 2016.

Deteriorating order books resulted in more cautious staff recruitment policies, highlighted by a moderation in employment growth to its slowest for 11 months. Sub-contractor usage also decreased during the latest survey period.

Inflation on input costs for construction firms remained close to the peaks seen at the start of 2017, which was partly linked to prices for imported items.

Tim Moore, associate director at Markit and author of the PMI, said: “July’s data reveals a growth slowdown in the UK construction sector, mainly driven by lower volumes of commercial development and a loss of momentum for house building.

“Worries about the economic outlook and heightened political uncertainty were key factors contributing to subdued demand.

“The combination of weaker order books and sharply rising construction costs gives concern that an extended soft patch for the construction sector may be on the horizon.”

Mike Chappell, global corporates managing director for construction at Lloyds Bank Commercial Banking, said: “It has been a mixed month for the sector, so this dip in the reading is not a major surprise. The hope is that it is a blip rather than the beginning of a downward trend.

“Results from commercial contractors show margins are holding up reasonably well and improving. Meanwhile, any nervousness about pipelines has eased for many firms by the awarding of contracts for HS2.

“The principal headwinds – particularly input price inflation and concerns about the future supply of EU labour – remain, so the focus is on organic growth, continuing to boost margins to above the 2% mark and a disciplined approach to contract bidding.”