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Construction PMI Disappointment Hints at Slowing Economy

Carney in focus

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- Construction PMI suggests renewed slowdown in UK economy

- Brexit uncertainty cited for cautious approach to new construction projects

- But resilient client demand and supportive economic conditions suggest sector won't go into recession

The August IHS Markit Construction PMI fell more than expected to read at 52.9 to 52.9, reversing its July gains.

This is a sizeable drop from July's 55.8 and suggests a rapid slowdown in activity in a sector that has struggled in 2018.

The data comes a day after a worrying picture was painted by the manufacturing PMI which came in at 52.9, below expectations for 53.9 and could hint that the UK economy is slowing down in the second half of 2018.

The data points to a renewed slowdown in output growth across the UK construction sector, with all three broad categories of activity recording a loss of momentum since the previous month.

"Cracks in the construction sector’s masonry were beginning to show again this month, and the house building sub-sector was hit the hardest as it reported the poorest performance since March this year," says Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, sponsors of the report. 

Mirroring the trend for construction output, latest data revealed a slowdown in new business growth from July’s 14-month peak.

Construction PMI

IHS Markit report anecdotal evidence citing resilient client demand and supportive economic conditions, but there were also reports that Brexitrelated uncertainty continued to hold back investment spending.

However, firms noted continued demand for construction inputs that put pressure on supply chain capacity in the month, "which could bode well for continued expansion in the sector in the coming months," say TD Securities in a comment on the data.

Both commercial and residential activity continued to expand, though residential construction growth slowed somewhat.

“The sector is hovering too close for comfort to the no change mark which makes it a contender for more disappointment next month. Though the path to Brexit is paved with good intentions, without significant progress the sector will soon be building castles in the air rather than on solid ground,” warns Brock.

For concrete signs of any potential slowdown in the UK economy markets will be interested in seeing the outcome of the services PMI due out mid-week. Recall, the services sector accounts for over 80% of UK economic activity.

A good read could provide some stability for Sterling, but markets will be nervous following the construction and manufacturing disappointments.

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