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Construction Sector Slumps in May, Adds to Fears the UK Economy is in a Sharp Slowdown

Construction

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- UK construction contracts in May

- Employment in sector down to 6-year low

- All eyes on Wednesday's Services PMI after Monday's Manufacturing PMI also showed contraction

Further confirmation that the UK economy is stalling ahead of the mid-year point was today confirmed by the release of survey data that showed the construction sector shrunk in May.

Further confirmation that the UK economy is stalling ahead of the mid-year point was today confirmed by the release of survey data that showed the construction sector shrunk in May.

The IHS Markit Construction PMI read at 48.6 in May, well below the 50.5 reported in the previous month.

Markets were expecting a reading of 50.5 to be reported in May.

A figure below 50 represents contraction.

According to IHS Markit, compilers of the survey, UK construction companies indicated a renewed decline in total business activity during May. Lower volumes of commercial work and civil engineering activity more than offset a modest increase in house building. New orders also decreased across the construction sector, with survey respondents noting that subdued domestic economic conditions had led to project delays and fewer tender opportunities.

May data also revealed a decline in civil engineering activity for the fourth consecutive month.

Meanwhile, construction firms signalled a fall in business optimism to its weakest since October 2018.

"The biggest shock however, came in the form of job creation as hesitancy to hire resulted in the largest drop in employment for six and a half years. Not much to be happy about it seems though an easing in some input costs for raw materials offered some relief while energy and fuel prices continued to rise," says Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, sponsors of the PMI release.

Reduced workloads led to more cautious recruitment strategies and the non-replacement of departing staff in May.

Concerning the outlook, some elements of the construction sector are expected to continue struggling we are told, while the sector as a whole should nevertheless see a pick-up over coming months: 

"We expect the commercial and civil engineering sectors to continue to struggle, given the likelihood that Brexit uncertainty persists well beyond the current October “deadline”. But this year’s near-6% increase in public sector gross investment should stimulate the sector, while housebuilding should retain its momentum, given the likely further fall in mortgage rates ahead and the ongoing stimulus from the Help to Buy Scheme. All told, then, we still expect overall construction output to edge up over the next year," says Samuel Tombs, Chief U.K. Economist with Pantheon Macroeconomics.

The disappointing construction data comes 24 hours after it was revealed the manufacturing sector also slumped in May, raising concerns that the UK economy is heading for a notable slowdown.

However, the true extend of any slowdown will depend on the dominant services sector which accounts for over 80% of UK economic activity.

The Services PMI will be released on Wednesday and should attract more attention than usual given the trajectory of the first PMI releases of the month.