The latest CIPS/Markit Purchasing Managers’ Index (PMI) data shows that global forces continue unremittingly to batter all UK industries, with the ailing construction industry the sick man of the economy.
Indeed, construction firms’ purchasing managers say the slight improvement in operating conditions in the past month only reaffirms how bad things have been for UK contractors. Talk of green shoots should be taken with a large pinch of weedkiller.
One reason for the optimism was that the construction PMI rose sharply from 38.1 in April to 45.9 in May. This is a massive jump and the sector is beginning to catch up with manufacturing. However positive that may be, the reality is that this sector has now performed below the neutral 50 benchmark, (that is, has been suffering severe retrenchment) for 15 straight months.
To show how severe, it is necessary to compare construction with the rest of the economy.
The construction PMI reading is now higher than the manufacturing PMI, which posted 45.4 in May, but this distracts from the fact that the sector has consistently underperformed manufacturing for months and has much further to go before it reaches its previous levels. The services sector has also fared much better than construction in the recession.
A more detailed look at the data shows a number of issues challenging the construction sector. As you will have gathered by now, continuing market uncertainty, dwindling demand and fierce competition has resulted in leaner order books for contractors.
Nonetheless, the rate of decline in the number of orders placed fell at its least catastrophic rate since last August as many contractors were forced to cut client budgets to secure business.
In turn, employees have been at the coal face as firms struggle to balance workloads and keep costs down. After hitting an all-time low for these surveys in March, when firms culled staff at an unprecedented rate, we are now seeing a slight decline in the rate at which jobs are jettisoned. Although smaller companies were the first to make the move, we have now seen firms of all sizes streamline staff as the recession’s bitter bite continues.
But even on the backdrop of such gloom, there are some glimmers of hope as other sectors improve slightly, and may therefore need some building work done at some point.
One positive factor is the weakness of the pound, which is helping many manufacturers that rely on export orders. And, indeed, the rate of decline in foreign demand has eased noticeably.
The services PMI data indicates that this area of business has contracted for a whole year now; however, the latest data shows that overall activity fell at a much slower rate, and that sentiment among firms improved slightly.
The bad news is that it is widely speculated that the services economy will not be able to sustain this speedy level of recovery.
Even on the construction front, there has been some hints of improvement. It’s clear that the government’s £3bn stimulus package is starting to make headway. One effect is that the performance of the civil engineering industry has climbed to a sixth-month high.
Optimism also improved at the fastest rate in 10 months, as firms become less anxious about future performance. Although the global downturn has been largely branded a white-collar recession, meaning that the financial and wider business services industry has taken the biggest hit, it’s clear that all UK sectors have suffered – with construction fairing the worst.
Though we are seeing improvements, it will take a long time for our economy to recover from this aggressive recession.
Roy Ayliffe is director at the Chartered Institute of Purchasing & Supply
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