Deep Plunge in Construction PMI Suggests Sector is Now Shrinking, but Rebound in Activity Anticipated

UK construction sector suffers sharp decline

Image © M. Jorwa, Adobe Stock

IHS Markit report their UK Construction PMI for March 2018 read at 47.0 down from 51.4 a month earlier, well below consensus forecasts from economists which anticipated a reading of 50.9.

A reading below 50 signifies contraction and today's number is the worst outcome since July 2016, the month following the EU referendum.

There was no impact on Sterling, with data suggesting the currency actually ticked higher against the Euro and Dollar on the release.

This could be because the sector is such a small component of the overall UK economy, and importantly, weather does however appear to be the culprit behind this headline with IHS Markit reporting survey respondents as having noted that unusually bad weather conditions had been a key factor behind the drop in construction output, with snow-related disruption having a particularly negative impact on civil engineering projects.

“Snow stopped play in March, as the unseasonal weather restricted overall activity, lengthened delivery times and triggered the fastest drop in new orders since July 2016," says Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply which sponsor the report.

Despite the weather, we can't avoid the fact that the trend for the sector is worrying; construction companies indicated a decline in new business volumes during March, which continued the downward trend seen so far in 2018.

"The marginal improvement in residential building was softer than in most of 2017
indicating there may be something more serious ailing the sector, as respondents also cited continuing Brexit-related uncertainty and disappointment over the performance of the UK economy," says Brock.

But, business activity expectations and job creation both picked up in March, which provides a clear signal that construction firms anticipate a rebound in activity during the months ahead.

Employment growth accelerated  Confidential | Copyright © 2018 IHS Markit Ltd Page 2 of 4 to a three-month high. Additional staff hiring was attributed to forthcoming project starts and long-term business expansion plans.

"With the strongest job creation this year, firms had a more hopeful outlook for the coming months coupled with the highest level of optimism since June 2017, as they scoured the wider marketplace for opportunities," says Brock.

There was further good news in that purchasing levels increased slightly, sustained by the respite of pressure from cost increases which were the lowest since June 2016 and where the worst impact of the weak pound on prices may have dissipated.