Recession eases but “blue skies still a fair way off”
The severity of the recession in the UK construction economy moderated noticeably during April. The easing was predominantly centred on the civil engineering industry, although housing and commercial sub-sectors also experienced weaker falls in output. Even so, overall activity levels continued to contract rapidly as global financial and economic difficulties created uncertainty throughout the supply chain and affected demand.
The CIPS/Markit UK Construction Purchasing Managers’ Index (PMI) rose sharply from 30.9 in March to 38.1 in April, pointing to a far weaker retrenchment of total industry activity. Indices tracking trends in housing, commercial and civil engineering output all rose since the previous month, and markedly in the latter two cases. Still, all remained well below the neutral mark of 50.0, signalling rapid contractions in building activity. Housing was again the worst-performing area of UK construction.
The level of new orders received by UK construction firms continued to fall steeply in April. Respondents predominantly blamed unfavourable market conditions, lacklustre demand and intense competition for the latest drop in new orders. Some companies also noted that customers had cut their budgets. That said, the rate of contraction weakened considerably since March to the slowest for eight months.
Roy Ayliffe, director at the Chartered Institute of Purchasing & Supply, said: “The darkness that has been gathering across the UK construction economy over the past 13 months lifted slightly in April but, against a backdrop of ongoing market uncertainty, fewer new orders and fierce competition, blue skies are still a fair way off.
“Nonetheless, confidence in future sector performance improved. A number of purchasing managers also noted that previously postponed contracts were expected to recommence.”
Milder contractions in activity and new orders were reflected in the level of positive sentiment amongst UK constructors in April. Optimism rose to the greatest extent since June 2008, with most panellists expecting business conditions to improve over the next year. Other reasons for confidence included company expansions, current contract negotiations, promotional activities and the start of postponed projects. However, sentiment remained very subdued by historical standards.
Improved confidence for the future impacted on rates at which employment, subcontractor usage and buying activity were reduced in April. All were cut to lesser extents than during the previous month, with indices following trends in employment and input purchases hitting six- and seven-month highs respectively. However all continued to contract at substantial rates.
Lead times shortened considerably in April, marking one year of improvements in average vendor performance. Reduced delivery times partly resulted from falling demand for inputs from UK constructors, but also from the better availability of raw materials.
April data indicated a further steep drop in average input costs across the UK construction economy. The fall reflected poor international demand for commodities. That said, the rate of decrease moderated noticeably since March.
Gemma Wallace, economist at Markit Economics said: “The recession in the UK construction economy, which had been generally deepening, eased off sharply in April. The headline PMI rose to its highest level for seven months. It was another step in the right direction, but it will take a lot more to restore confidence, and therefore demand, in the sector – let alone to pre-crisis levels.
“The housing industry in particular will find it difficult to recover. On the supply side, constructors are worried about falling house prices, which have largely been driven down by factors restricting demand. Banks have turned more risk-averse, keeping credit availability tight, which has led to falling mortgage approvals. These issues are likely to persist and affect house building activity for some time to come.”
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