- Purchasing managers indicate that construction expansion slowed to a five-month low in October, adding to evidence that the UK economy was slowing at the start of Q4, even before the announcement of a one-month lockdown across England from 5 November
- Waning pent-up demand and the risk to jobs from the imminent end of the furlough scheme seemingly affected the economy in October, as did increasing local COVID-19 restrictions
- The construction sector completes a softer set of purchasing managers’ surveys for October
- Looking ahead, while the new national lockdown in England will have a negative impact on the construction sector, the sector should be less affected than most others as the Government has explicitly stated that construction work should continue where possible
- With the economy affected by a month-long national lockdown in England, renewed contraction over Q4 seems inevitable. The EY ITEM Club suspects that GDP could contract by around 5% quarter-on-quarter in Q4
- The construction PMI dipped to 53.1 in October from 56.8 in September; it had reached a 57-month high of 58.1 in July
- All sectors saw weaker activity in October compared to September. Housebuilding remained robust but slowed from September, while commercial activity expanded at the slowest rate for five months. Civil engineering activity contracted for a third month running and at a faster rate
- On a positive note, new business growth was the strongest since December 2015, as COVID-delayed projects went ahead and the residential housebuilding sector remained robust
Howard Archer, chief economic advisor to the EY ITEM Club, says:
“The purchasing managers’ survey showed construction expansion lost momentum in October to be at a five-month low. The construction PMI dipped to 53.1 in October after rising back up to 56.8 in September from 54.6 in August. It had peaked at a 57-month high of 58.1 in July, benefiting from a ‘catch-up’ of work following the restrictions on activity earlier in the year. The construction PMI had been as low as 29.9 in May and reached a record low of 8.2 in April when most sites were closed due to the lockdown introduced on 23 March.
“October’s reading of 53.1 was still markedly above the 50.0 level that indicates unchanged activity, pointing to clear expansion. However, it was back below the construction PMI lifetime (1997-2020) average of 53.7.
“While the new national lockdown in England will have a negative impact on the construction sector, the sector should be less affected than most others as the Government has explicitly stated that construction work should continue where possible.
“Further out, construction companies will be hoping that the Government’s planned increase in infrastructure investment feeds through as quickly as possible to boost activity.”
All sectors saw softer activity in October compared to September
Howard Archer adds: “All construction sectors saw softer performances in October compared to September.
“Housebuilding growth slowed but was still at a robust level. The housing market has seen a pick-up in activity since restrictions were lifted from May onwards, further helped by the Chancellor temporarily raising the Stamp Duty threshold from mid-July – although uncertainties remain about its longer-term outlook.
“Commercial activity grew for a fifth month running, but at the slowest rate since May.
“Civil engineering activity contracted for the third month running in October and at the fastest rate since May, after growing in July at the fastest rate since December 2018.”
New business growth highest since December 2015
Howard Archer continues: “Not all of the survey was weaker and there were some decent developments. New orders grew for a fifth successive month and at the fastest rate since December 2015. This was supported by projects going ahead, which had been delayed earlier in the year by the impact of COVID-19, and also by the residential house building sector remaining robust.
“Confidence in future activity among construction companies was at a decent level in October supported by rising orders and work in the pipeline, although there were uncertainties over the wider economic outlook.
“Employment in the construction sector continued to fall in October, although at a slower rate than earlier in the year.
“Construction activity was hampered by supply chain capacity problems. This led to a lengthening of delivery times for construction products and materials, with the latest deterioration in supplier performance the fastest since June.”
Outlook for economy following the announcement of new national lockdown in England
Howard Archer adds: “There seems little doubt that a renewed national lockdown will cause the economy to contract again in the fourth quarter – and, very possibly, by an appreciable amount. The EY ITEM Club’s initial forecast is that there could be a fourth quarter GDP contraction of around 5%.
“Even before a new national lockdown in England – as well as varying measures announced so far in Scotland, Wales and Northern Ireland – the fourth quarter was looking more challenging for the UK economy, and it was likely there would be a marked rise in unemployment as the furlough scheme drew to a close in October - even allowing for the Government’s latest, more generous job support measures. On top of that, business caution has been added to by uncertainties over whether the UK and EU will reach a trade agreement by 31 December.
“There were already signs of the economy losing momentum with local restrictions being introduced. Consumer confidence fell in October, according to GfK, the CBI distributive trades survey indicated a softening in retail sales, the Lloyds business barometer showed weakening business confidence, and the flash October purchasing managers surveys showed slowing manufacturing and, especially, services activity. Furthermore, the services PMI showed falling new business.
“The EY ITEM Club doubts that any upcoming GDP contraction will be as much as witnessed in April (which experienced the full effect of the restrictions introduced on 23 March) and over the second quarter (when the economy contracted 19.8% quarter-on-quarter). Hopefully, experience has been gained in keeping activity going. People and companies have got used to home working, while some workplaces and offices have been adjusted to meet COVID-19 health and safety requirements. This includes construction sites and manufacturing plants, which the Government has stressed it wants to keep operating through the new lockdown.
“The new lockdown measures are less severe than those introduced on 23 March, and schools being kept open will make it easier for people with children to keep working. With schools, colleges and universities all staying open, there will not be the large decrease in education output that weighed on GDP in the second quarter. Education output contracted 27.6% quarter-on-quarter in the second quarter after a decline of 8.4% in the first quarter.
“Nevertheless, the impact on the economy is likely to be significant and some sectors will be substantially affected – most obviously hospitality.
“While the EY ITEM Club’s initial estimate is that GDP is likely to contract by at least 5% quarter-on-quarter in the fourth quarter, and possibly by more, much will depend on what happens after 2 December and whether the lockdown continues and what the following tiered local restrictions will be.”