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Construction weakness continues in October amid further fall in new work

* UK_Construction_graph.jpgIn figures released recently, October data highlighted another difficult month for the UK construction sector, with the latest Markit/CIPS UK Construction PMI survey showing a subdued trend in output levels alongside moderate reductions in new work and employment.

Adjusted for seasonal factors, the Index registered 50.9 in October, up from 49.5 in September - but only fractionally above the 50.0 no-change value. The latest reading was also much weaker than the average seen in the decade leading up to the global financial crisis in 2008 (56.3), thereby highlighting an ongoing subdued trend in output across the construction sector.

Higher levels of construction output were confined to civil engineering in October, with the sub-sector registering moderate growth for the second month running. Residential building activity was the weakest performing broad area of construction monitored by the survey, with output declining for the fifth successive month. Commercial activity also dropped in October, but at only a marginal pace.

The subdued trend in construction output during the latest survey period reflected an ongoing downturn in new business volumes. The current period of falling new order volumes is the longest since that seen during 2008/09, which respondents linked to squeezed budgets and worries about the economic outlook among clients.

A lack of new work to replace completed projects in turn resulted in a return to job shedding during October. Although much less marked than that seen in 2008/09, the latest fall in staffing levels was the fastest since August 2011. Sub-contractor usage also decreased at a solid pace in October, extending the current period of decline to three months.

Construction companies' assessment of the year-ahead business outlook remained low in the context of the survey history. Reflecting this, at 56.2 in October, the index measuring business expectations was closer to the survey-record low seen four years ago (45.9) than the long-run series average (70.4). Construction firms mostly noted that shortages of new business, alongside lending constraints and lower budgets among clients, had led to relatively subdued business sentiment.

Meanwhile, volumes of purchasing activity across the construction sector dropped for the fifth month running and at a slightly faster pace than in September. However, delivery times from suppliers continued to lengthen, thereby extending the current period of deteriorating vendor performance to 26 months. Anecdotal evidence generally attributed worsening delivery times to a lack of stocks and capacity reductions at suppliers.

Input price inflation accelerated further from June's recent low, with the latest rise in average cost burdens the fastest in 2012 to date. In line with recent trends, survey respondents mostly commented on higher fuel and energy costs during October.

"October's survey indicates an improved trend in UK construction output compared to the declines seen through the Summer," says Tim Moore, Senior Economist at Markit and author of the Markit/CIPS Construction PMI.

"However, the bigger picture remains bleak given ongoing falls in new orders alongside renewed job cuts across the sector over the month.
"Construction firms are seeing the most protracted period of new business losses since 2008/09, meaning an escalating shortage of work to replace completed projects.

"Reflecting this, the year-ahead business outlook was still relatively subdued during October, as survey respondents cited weak spending patterns and squeezed budgets among clients. Some construction firms also noted greater worries about competition for new work amid signs of over capacity in parts of the industry."

Commenting on the report, David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply, said:

"Despite marginal growth in October, the prospects for the construction sector are bleak as firms prepare for the worst. They are heading into a long, dark winter, by shedding jobs and laying off subcontractors in response to the longest decline in new business since the start of the financial crisis in 2008/2009.

"There is contagion right along the supply chain with rising fuel and energy costs and lengthening delivery times ensuring there is little hope of respite in the immediate future. All of this compounds the imminent threat of budget cuts in 2013.

"If there is any silver lining to the dark cloud which hangs over the industry, it is that there is at least one part, civil engineering, which remains in growth territory. But this is scant consolation given the continued decline of the housing and commercial sectors."

www.markit.com

2nd November 2012




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