UK construction output drops at fastest rate since 2009

UK construction output continued to fall in July as activity dropped by the fastest rate in seven years, further raising the risk of a recession and possibly increasing the likelihood of a Bank of England rate cut this week.

The Markit/CIPS construction industry Purchasing Mangers Index (PMI) slid to 45.9 in July from 46.0 the month before, which was not as bad as the consensus 44.0 feared by economists but still was the second successive sharp fall and the biggest decline since June 2009.

A steep fall in commercial building alongside a drop in civil engineering activity for the first time in 2016 were the reasons for the accelerated decrease, while residential construction also fell in July but at a lesser rate after June’s three-and-a-half year low.

Residential construction PMI picked up to 45.6 from 43.8 in June, but this was more than offset by a worsening in the commercial and civil engineering PMIs to 43.9 and 47.1, from 45.9 and 50.2 respectively.

Construction companies blamed continued weakness in order books for the slowdown, with Markit finding an overall reduction in new work for the third month running, although the rate of decline eased since June and was close to that seen in early-2013.

“UK construction activity fell sharply for a second successive month in July, pointing to an ongoing impact of Brexit-related worries on the economy that raises the risk of a recession," said Markit's chief economist Chris Williamson.

Combining the construction PMI with Monday's equally gloomy final manufacturing PMI and the recent flash services PMI, Williams said the ‘all sector’ PMI looks likely to have sunk to 47.3 from 51.9 in June, which would be the steepest fall in business activity since April 2009, while the 4.6 point drop would be the largest ever deterioration recorded since the surveys began in 1997.

“The extent of any downturn remains highly uncertain, and dependent on any policy reaction to the weak data," he said, adding that it seemed almost a foregone conclusion that this week will see the Bank of England slash its growth forecasts and take interest rates down to a record low of 0.25%.

Sam Tombs at Pantheon Macroeconomics said the PMI data indicated the construction sector was bearing the brunt of the post-referendum collapse in business confidence and, while the effect on the sector would not be nearly as bad as in the financial crisis, it will likely be a while before it fully recovers.

"The much healthier condition of the banks in this crisis suggests that the construction sector’s developing downturn will be much milder than the collapse in 2008/09, which saw a peak-to-trough fall in output of 17%," Tombs intoned.

"Still, the likelihood that Brexit negotiations will be protracted suggests that businesses will remain reluctant to commit to major capital expenditure for a long time to come. Meanwhile, the public investment plans won’t be reviewed until the Autumn Statement at the end of the year and most major construction projects have long lead times. So its hard to see the construction sector escaping its recession within the next year."

With the City once again pricing a BoE rate rise this week, Michael Hewson at CMC Markets called for the BoE to hold off, as it remained "far too early" to establish the true damage done to the UK economy as a result of recent Brexit-inspired uncertainty, "irrespective of what recent PMI and confidence data tells us".

He went on: "Proponents of stimulus this week will no doubt argue that this week’s awful manufacturing and construction numbers mean that the bank has to act, but just because we’ve seen a knee jerk plunge in consumer and business confidence doesn’t mean that we’ll continue to head lower. As it is with rates already at record lows it is not immediately apparent what a further rate cut now would achieve, apart from reinforce the negativity surrounding the UK economy, which in turn could see any further measures backfire."