Press release

3 Jan 2020 London, GB

Purchasing managers report construction activity contracted at faster, deep rate in December

Purchasing managers’ report outlines a largely poor December for the construction sector.

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  • Purchasing managers’ report outlines a largely poor December for the construction sector. It shows activity contracting for an eighth month running and at a deeper and sharper rate.
  • December's PMI fell to 44.4 (45.2 in November) and pointed to contraction occurring across the civil engineering (deepest since March 2009), commercial and house building sectors.
  • Worryingly for near-term activity prospects, new orders contracted for a ninth successive month; this is the longest run of declines since 2012-13. Political and Brexit uncertainties fuelled reluctance by some companies to commit to new projects, weighing down on new business.
  • Construction companies will obviously be hoping that the uncertainties surrounding the economy are diminished by the decisive General Election result and the UK now inevitably leaving the EU with Boris Johnson's deal on 31 January. This should help increase some companies’ willingness to commit to commercial and residential projects.
  • Construction companies will also be hoping that the Government’s planned step-up of investment in infrastructure feeds through as quickly as possible to boost activity.
  • Construction companies will also likely be looking to the Budget for 2020/21, which is likely to be held in February or March, and may be hoping that it contains significant measures aimed at boosting the housing market.
  • Consistent with this hope, confidence among construction companies rose to a nine-month high in December.
  • With the manufacturing and “flash” services surveys also showing activity contracting at a faster rate in December, the weak construction PMI adds to the impression that the economy had a difficult fourth quarter of 2019. This is even allowing for the fact that the purchasing managers’ surveys can tend to present an overly gloomy picture at times of heightened uncertainties.
  • There is a real possibility that the economy stagnated in the fourth quarter as heightened domestic political, economic and Brexit uncertainties took a toll. We suspect at the very best, the economy eked out growth of just 0.1% quarter-on-quarter. Consequently, GDP growth is expected to have been 1.3% overall in 2019, the equal weakest performance (with 2018) since 2009.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

“The purchasing managers’ survey points to the construction sector contracting at a deeper, sharper rate in December. Furthermore, December marked the eighth successive month of construction contraction.

“Specifically, the construction PMI dipped to 44.4 in December from a four-month high of 45.2 in November. It had previously edged up to 44.2 in October from 43.3 in September, which had only been fractionally above the more than 10-year low of 43.1 suffered in June.

“December’s reading of 44.4 was substantially below the 50.0 level which indicates flat activity and is down on the index’s lifetime (1997-2019) average of 54.1.

“All sectors saw contraction in December. Most notably, civil engineering contracted for an 11th successive month and saw the deepest fall in activity since March 2009. Political indecision and delays in awarding contracts were reported to be contributory factors.

“There was also a sharp drop in commercial activity which contracted for a 12th month running – some spending decisions in the sector were reported to have been postponed before the General Election.

“Meanwhile, house building suffered a seventh successive month of contraction, although the decline was relatively modest.

“New orders contracted for ninth month running. This is the longest run of falling orders since 2012-13. Confidence was reported to be subdued with a reluctance by some companies to commit to new projects, particularly in response to domestic political and Brexit uncertainties. The commercial sector was particularly hard hit by this.

“Confidence among construction companies rose to a nine-month high in December – lifted by hopes that greater clarity on Brexit would boost orders.

“Employment in the sector fell for a ninth month running, although the decline was the slowest for four months and modest. This is the longest run of falling employment in the sector for more than eight years.

“Some much needed good news for construction companies saw input prices rise at one of the slowest rates since February 2010.”

Construction output suffered sharp relapse

“Latest ONS data shows that construction output contracted 2.3% month-on-month and 2.1% year-on-year in October; this followed a drop of 0.2% month-on-month in September.

“This also followed construction output growing 1.2% quarter-on-quarter in the third quarter after contracting 1.0% quarter-on-quarter in the second quarter.

“New construction orders were reported to have edged up just 0.3% quarter-on-quarter in the third quarter after plunging 14.5% in the second quarter; they were down 6.8% year-on-year.”