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Growth of construction activity weakest in eight months

October data provided further evidence that the recovery of the UK construction sector peaked in the summer, with rises in both new orders and activity slowing. The seasonally adjusted Markit/CIPS Construction Purchasing Managers' Index posted 51.6 in October - the lowest reading in the current eight-month sequence of expansion. Meanwhile, constructors implemented a further round of job cuts, with future expectations also remaining relatively weak.

Of the three broad UK construction sub-sectors, only commercial reported a rise in activity in October. Furthermore, the expansion in commercial-based construction slowed during the month. Housing and civil engineering both recorded contractions in activity (albeit only marginal in the latter). The decrease in residential construction was solid, and the second in successive months, indicating that the sector's improved performance during the first half of 2010 may now be reversing.

New order books at construction companies in the UK increased during October. However, the rate of growth eased for a fifth consecutive month from May's recent high. Anecdotal evidence suggested that the volume of new tender opportunities was decreasing, as customers were reluctant to commit to new projects.

October data signalled a solid reduction of employment in the UK construction sector. Panellists commented that the general slowdown in the industry had led them to assess costs. Some companies indicated that redundancies had driven job cuts. Staffing levels have now decreased for four months running. Usage of sub-contractors also declined during the month.

Purchasing activity also fell in October. Constructors commented that existing contracts were drawing to a close with new business growth slowing, reducing the need for extra inputs. Despite this, delivery times increased as suppliers remained hesitant to hold inventories. However, the lengthening in lead times was only modest.

Input prices faced by construction companies in the UK continued to increase during October. Panellists commented that rising raw material prices had contributed to the latest increase in costs. However, the rate of inflation was the slowest in eight months.

UK constructors remained optimistic regarding future business activity in October. The degree of positive sentiment strengthened since September, although remained weak in the context of historical data. Companies remain wary over the potential negative impact that impending cuts in government spending will have on the sector and the economy in general.

 "Whilst the UK construction sector managed to record growth in October, it seems more evident that the current expansion has peaked," warns Sarah Ledger, Economist at Markit and author of the UK Construction PMI.

 "The month-on-month rise in new business eased once again, with constructors attributing this partly to reluctant clients that are concerned over public spending cuts and the health of the general economy. The slowdown in the sector was highlighted by another month of job cuts, while confidence remained at relatively low levels.

"Looking ahead therefore, it may be reasonable to assume that construction will have less of a positive impact on GDP compared to Q3."

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

"The recent growth in the construction sector seems to be petering out. Further declines look inevitable as nervy customers and a spendthrift public sector put firms in a precarious position. Construction will have to look much harder for new contracts going forward, so it's no surprise that many are cutting jobs and reducing purchasing activity to provide a safety net against further falls.

"This data is particularly nerve-racking given the boost the construction sector gave to the overall GDP growth last quarter. Commercial activity may have fared less badly than in the underperforming housing market, but overall expectations of future business remain historically low. The high hopes of earlier in the year seem to have given way to dire predictions on what the future may hold."

The Purchasing Managers' Survey is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 170 construction companies. The November Report on Construction will be published on Thursday 2nd December 2010.

T: +44 1780 761576

E: [email protected]

W: www.markit.com

5th November 2010

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