Press release

6 Apr 2020 London, GB

UK construction activity contracted at fastest rate since April 2009 – EY ITEM Club comments

The purchasing managers reported that construction activity suffered a sharp relapse in March, as coronavirus-related restrictions increasingly hampered activity and construction sites were closed.

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  • The purchasing managers reported that construction activity suffered a sharp relapse in March, as coronavirus-related restrictions increasingly hampered activity and construction sites were closed.
  • Specifically, the construction PMI fell back to 39.3 in March (from a 14-month high of 52.6 in February), taking it to the lowest level since April 2009.
  • All construction sectors contracted in March – commercial and civil engineering activity both contracted the most for 11 years, while house building also declined.
  • All elements of the survey showed a marked deterioration in March. Most notably, new business contracted at the second fastest rate (after last August) for 11 years, while confidence in the sector was at the weakest level since October 2008.
  • Employment in the construction sector declined at the fastest rate since September 2010. Following on from the latest manufacturing and services surveys, this further highlights the importance of the Government’s Coronavirus Job Retention Scheme and the need to ensure that it is effectively implemented.
  • The weakened set of March purchasing managers’ surveys for the construction, services (especially) and manufacturing sectors reinforces EY ITEM Club’s expectation that GDP declined by at least 0.5% quarter-on-quarter in the first quarter, even though coronavirus did not have a significant negative impact until March.
  • EY ITEM Club’s current expectation is that GDP will decline by around 12% quarter-on-quarter in Q2.
  • We expect GDP to contract 5.8% over 2020. There are clearly substantial downside risks, but we believe the economy can start to recover in the third quarter and then see a further pick-up in activity late in the fourth quarter. This is on the assumption that coronavirus peaks during the second quarter and the Government starts to relax some of the restrictions on people’s movements and on business activity during the third quarter.
  • Further out, construction companies will be hoping that the Government’s planned investment in infrastructure in the Budget feeds through as quickly as possible to boost activity.

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

The purchasing managers survey showed that construction activity suffered a relapse in March as coronavirus-related restrictions increasingly impacted and construction sites were closed.

Specifically, the construction PMI fell back to a near 11-year low of 39.3 in March after climbing to a 16-month high of 52.6 in February from 48.4 in January and 44.4 in December. This took the construction PMI back below the 50.0 level which indicates flat activity. The first two months of 2020 had indicated that the construction sector was benefitting from increased willingness by some companies to commit to new projects amid reduced uncertainties following December’s decisive General Election result. Reduced near-term Brexit uncertainties following the UK leaving the EU with a deal on 31 January also appeared to have helped matters.

All parts of the construction sector saw a weakened performance in March. Civil engineering was the weakest performing sector and contracted at the fastest rate since March 2009.

Commercial activity also contracted sharply – also the most since March 2009. House building was the most resilient sector with activity contracting at the sharpest rate since October. Significantly though the survey observed that “construction companies often commented on an expected slump in house building from stoppages on site amid increasing measures to slow the spread of COVID-19”. It is also evident that the housing market is now coming to a standstill after a marked pick-up at the start of the year. The Government has advised homebuyers and renters to delay moving as much as they can while the emergency measures are in place. The Government has further stated that no visitors are allowed to visit properties while “stay-at-home” measures are in force, including estate agents and surveys as well as potential buyers.

New orders contracted sharply

New orders fell at the second fastest rate (after August 2019) since March 2009, boding ill for construction activity in the near term at least. The survey observed that “survey respondents commented on a combination of weaker demand and concerns among clients about the feasibility of starting new projects during the COVID-19 outbreak.

Confidence among construction companies was at the lowest level since October 2008.

Employment in the sector declined at the fastest rate since September 2010.

Intense supply chain pressures occurred in March as the COVID-19 pandemic resulted in reduced capacity and shortages of stock among vendors. The latest lengthening of lead-times among vendors was the steepest recorded since October 2014. Input prices rose at a slower rate.