Construction activity still shrinking but at slowest rate in 18 months

August data reveals a further contraction in business activity within the UK construction sector. However, the rate of decline eased marginally since July to its slowest pace in 18 months.

The seasonally adjusted CIPS/Markit Construction Purchasing Managers’ Index (PMI) posted a score of 47.7 in August, indicating a solid fall in the level of activity within the UK construction sector. A score of below 50 represents contraction.

All of the three sub-sectors (commercial, housing and civil engineering) continued to report reductions in activity, although the rate of decline was only marginal within the commercial sub-sector and slowed on the previous month’s data.

The housing sub-sector recorded a marked easing in the rate of contraction posted in July. In contrast, the fall in activity registered in the civil engineering sector worsened during the month.

David Noble, chief executive officer at the Chartered Institute of Purchasing & Supply, said: “Though August saw a reduction in the rate of deterioration in the construction sector, it is still the sick man of the UK economy. Far from seeing signs of a return to growth, the sector remains stuck in an unprecedented 18-month period of contraction.

“Civil engineering – which had so far proven less volatile than the other two sub-sectors – performed the worst in August, reflective of the instability of the industry as a whole.

“Perhaps most concerning was further news of job cuts as companies tried to manage reduced levels of business.”

Incoming new business posted a further decline in August, and at a marginally steeper rate of contraction compared to that recorded in July. However, current levels of decline in new orders have eased markedly over levels reported at the beginning of the year, as market conditions show continuing signs of stabilisation.

Purchasing activity continued to fall sharply in August. While the rate of decline eased marginally since July, anecdotal evidence suggested that UK construction companies are still preferring to reduce existing stock levels to meet activity requirements, rather than use cash to buy new materials. Purchasing volumes have declined despite continued marked reductions in input prices.

The sharp rate at which input costs have fallen represents the extent of competition between suppliers that has resulted from decreased demand for materials. In line with lower quantities of purchases, suppliers improved their delivery times for the 16th successive month, with the latest rate of shortening in lead times marked, though slightly weaker than in July.

Employment levels contracted sharply in August as constructors continued to adjust capacity to accommodate reduced business. Use of subcontractors also declined, and at an accelerated pace since July.

Despite the maintained fall in current activity levels, UK construction companies indicated sustained optimism over future business activity. The degree of confidence was again high, reflective of forecasts for business expansion and gains in new orders.