UK construction growth softens amid political uncertainty

UK construction activity weakened more than expected last month, according to a survey published on Tuesday that revealed the lowest levels of optimism about growth this year.

Markit's construction purchasing managers' index for June gave came in at 54.8, down from 56.0 the month before and short of the City's consensus forecast of 55.0.

A PMI reading above 50 indicates growth and the industry has exceeded this level for 10 months now.

However, June's data revealed weaker growth momentum across the UK construction sector, Markit said, with business activity, new work and employment all expanding at slower rates than the prior month.

Activity seems to have been clearing a large backlog of work, but there was a lack of new work to replace completed projects, with new order growth at its weakest in three months.

Housebuilding continued to outperform commercial and civil engineering construction work, with residential activity in June the second-fastest month since December 2015, but all three sub-sectors did eased back slightly.

Construction businesses reported signs of renewed risk aversion among clients, reflecting concerns about the economic outlook and heightened political uncertainty.

Building companies were the least optimistic about their near-term growth prospects since December 2016, with a number of firms cited delays in decision making among clients, partly linked to heightened economic uncertainty.

Senior economist Tim Moore said the slowdown was largely reflecting weaker rises in commercial building and civil engineering activity.

“Survey respondents commented on renewed caution among clients, in response to heightened political and economic uncertainty. Fragile business sentiment led to delayed decision-making on large projects and greater concern about the outlook for workloads during the next 12 months.

He added: “Despite a softer rise in construction output, the latest survey revealed that supply chain pressures were among the most intense since early-2015. June data also pointed to strong input price inflation, driven by resilient demand and upward pressure on costs imported construction materials.”

Howard Archer, chief economic advisor to the EY Item Club, said: "Following on from a significantly weaker manufacturing survey, the softer construction PMI points to the economy faltering in June as heightened political uncertainties have fuelled business and consumer caution. Much attention will be focused on Wednesday’s release of the PMI for the key services sector, which has been finding life generally much more challenging in 2017."

Capital Economics' Ed Stansfield said that as the dip in the commercial construction PMI in June only partially reversed the previous month’s rise so "it does not alter the impression that developers see little risk that the current softness in most occupier markets represents a major downside threat to rental values".

June's dip partially reversed May’s rise but still sits marginally above the survey’s long run average of 54.5, he noted, and, taking the second quarter as a whole, the survey’s headline activity index averaged 54.6, a distinct improvement from the 52.3 figure seen in the first quarter.

"In other words, it adds to the evidence that economic activity strengthened in the second quarter."

Sam Tombs at Pantheon Macroeconomics pointed out that the average level of the PMI in the second quarter was consistent on past form with quarter-on-quarter growth in construction output of about 0.5% in Q2.

"The official measure of output in April, however, was 1.5% below its Q1 average, so unless the data are revised significantly the construction sector likely dragged on GDP growth in Q2."

He felt the sector was still struggling to regain its pre-referendum momentum, with the PMI remains above its 12-month average of 51.6 but a long way below its 59.6 average seen between 2014 and 2015.

He noted the number of construction firms reporting delays in obtaining raw materials had also increased, which suggested supply constraints will constrain the pace of growth in future.