UK construction activity still contracting but at slowest rate in 16 months

July saw a further decline in activity within the UK construction sector, extending the period of contraction to 17 months. However, the pace at which activity deteriorated eased since June to the slowest rate in 16 months.

The seasonally adjusted CIPS/Markit Construction Purchasing Managers’ Index (PMI) posted a reading of 47.0 in July, showing a solid fall in the level of activity within the UK construction sector. A score of below 50 represents contraction.

All sectors continued to report a drop in activity, although commercial and civil engineering posted slower rates of decline during July. Housing construction performance continued to lag behind the other sectors and registered an accelerated rate of contraction in the month.

A slight fall in new order levels was recorded during July, with the rate of decline in new business received by the UK construction sector the slowest in 17 months. A number of panellists indicated that pipeline work was returning, with offers to tender rising. Construction companies failed to revive purchasing activity, despite a near-stabilisation of new orders. The volume of buying levels recorded continued to reduce markedly, and showed only a marginal easing on June data.

Consequently, suppliers were able to improve their delivery times for the 15th successive month and at a faster rate than posted in June. Reduced buying activity alongside spare capacity at suppliers meant that input prices continued to fall in June. UK constructors noted that they were able to better negotiate with their suppliers given increased competition for business.

The length and depth of the economic downturn continued to be felt strongly in employment levels. Construction companies in the UK cut their workforces for the 14th month running. While the rate at which jobs were shed eased since June, a heavy pace of losses was still indicated.

Subcontractor usage fell during the month, and at a slightly faster rate than in June. Availability of subcontractors improved again, while their charges continued to fall at a marked pace. Optimism about future activity levels in 12 months’ time continued to increase in July, reaching its highest level since April 2007. Many construction companies in the UK believe that economic conditions will improve and lead to higher sales.

David Noble, chief executive officer at the Chartered Institute of Purchasing & Supply, said: “Optimism is returning to the UK construction sector on the back of a perceived improvement in economic conditions. Whilst the current situation still looks very bleak, an upturn looks much closer than it did just a few months ago. However, times are still tough as steep competition and difficult market conditions pushed the sector into its 17th month of retrenchment.

“Indeed, one area of concern is residential construction which has fallen back dramatically after showing recent signs of improvement. The market will need to improve substantially before we see the level of new builds return to pre credit crunch level. While access to credit and employment levels remain low, this is unlikely to happen soon.

“What’s more, though optimism in future sector performance continued to improve, unemployment levels are still high with over a quarter of firms admitting to axing their staff in July.”

Sarah Ledger, economist at Markit said: “Recession continued to plague the UK construction sector in July, although some positive signals started to emerge through the survey data. The sustained contraction recorded in the sector meant that construction companies maintained a cautious approach to business operations.

“Purchasing activity fell markedly, as costs were minimised, and staff numbers continued to be cut heavily. However, tentative signs of improved pipeline demand were reported, with a number of panellists referring to increased offers to tender. New orders were subsequently only slightly below those posted in June, which helped to reduce the rate of decline in activity to its slowest in 16 months. Underlining this, confidence over future business activity rose substantially.”