UK construction showing signs of slowdown

Activity in the UK construction sector hit its lowest level for 11 months in July, falling well below analysts’ expectations on the back of a weaker commercial building market and a softer expansion of housing activity.

The purchasing managers’ index, a closely scrutinised survey of the sector, came it at 51.9 in July – the lowest level since August 2016 and marking a heavy fall from June’s figure of 54.8. Analysts had pencilled in a more marginal slowdown to 54.0.

IHS Markit, which publishes the benchmark, said the weaker reading came as construction firms noticed “greater reluctance” from clients to commit to new projects. This weaker demand led to an overall reduction in new business volumes for the first time since September 2016.

It added that “intense supply chain pressures” continued and that prices for construction materials increased at one of the sharpest rates since the first half of 2011.

Tim Moore, associate director at IHS, said:

July 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. Weaker contributions from the cyclically sensitive areas of construction activity more than offset resilience in the civil engineering sector.

Worries about the economic outlook and heightened political uncertainty were key factors contributing to subdued demand. Construction firms reported that clients were more reluctant to spend and had opted to take longer in committing to new projects

Mike Chappell, a managing director for construction at Lloyds Bank, added:

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. These priorities are still key if the industry is to mitigate the risks in the current trading environment.