UK Construction Sector Hit By Brexit Uncertainty

British economic growth almost ground to a halt last month as the construction sector remained mired in stagnation in May to report the sharpest decline in construction output since March 2018. A survey of executives showed that the Brexit crisis and weaker global growth prevented businesses from committing to new projects. Troubling macro conditions let to project delays and fewer tender opportunities, indicating a renewed decline in total business activity during May after modest expansion in April. The overall growth in the economy was barely offset by a modest expansion among services firms. While house building saw a modest expansion, it was more than outweighed by reduced volumes of civil engineering activity and commercial work.

The headline seasonally adjusted IHS Markit/CIPS UK Construction Total Activity Index dropped to 48.6 in May 2019 from 50.5 in April, declining to well below market expectations of 50.5. An index reading of 50.0 means that there was no change in construction activity and the index registered below the 50.0 mark for the third time in the past four months, highlighting that the construction activity has fallen back into contraction territory. The latest reading pointed to the steepest contraction in the construction sector since March 2018, when snow-related disturbance led to a downturn in construction output.

The commercial building remained hardest hit by Brexit uncertainty, as output fell to the greatest extent since September 2017 and was the weakest area of construction activity in May. In response to Brexit uncertainty and concerns about the economic outlook, the participating companies said that clients had opted to hold back on major spending decisions. While some construction companies are choosing to delay the replacement of voluntary leavers, others have started cutting back on expansion plans, led to more cautious recruitment strategies and the non-replacement of departing staff in May. May data revealed that the employment component declined from 49.4 in April to 47.9 in May, reporting the latest fall in employment numbers in six-and-a-half years.

Due to constrained client budgets and a headwind from domestic political uncertainty, civil engineering activity declined for the fourth consecutive month, marking the longest period of decline since the first half of 2013. Many companies reported that they were finding it hard to replace completed projects with new ones as recent tender opportunities for civil engineering work had not been sufficient. Residential work was the only sub-category to not follow the downward trend, though the sector expanded at the weakest pace for three months and was softer than the average of 2018.

UK construction companies reported another decline in their purchasing activity, while pointing to a modest reduction in new orders received, with the rate of decline the steepest since March 2018. Reflecting subdued demand conditions in May, companies said that intense competition, hesitancy among clients could be experienced and supply chain pressures persisted, which led to another sharp lengthening of average lead times among vendors. While the overall rate of input price inflation declined to its weakest in two years, average input prices continued to rise in May, reflecting higher fuel and energy costs. Survey respondents said that business activity growth would be dampened over the next 12 months, citing domestic political and economic uncertainty as reasons, with business optimism declining to its lowest level since October 2018.