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Sharp declines in new orders

The latest market research has been released from IHS Markit CIPS covering UK construction activity, which shows sharp declines in new orders during August.

This loss of momentum in the sector is led by the sharpest reduction in new work since March 2009.

With business activity also declining for the fourth consecutive month, and at a slightly steeper rate than in July, alarm bells are ringing across the industry. Confidence across the sector is also weak, with business expectations for the year ahead weakening further, and registering the weakest confidence since December 2008.

Commercial work registered as the worst performing area of activity last month, with survey respondents continuing to cite delayed decision-making among clients in response to domestic political uncertainty.

The headline seasonally adjusted IHS Markit/CIPS UK Construction Total Activity Index registered at 45.0 in August, down on the July figure of 45.3, and below the 50.0 no-change threshold for the fourth consecutive month.

The figure is reflective of lower volumes of construction output, which have been attributed to worsening order books and a lack of new projects, with all three broad categories of construction work decreasing in August.

Brexit is at the top of most respondents thoughts, with the political uncertainty created leading to risk aversion and tighter budget setting among clients. Despite being the highlight for a number of months, civil engineering activity has also dropped in August, and at a relatively sharp pace. In contrast, house building fell only slightly and the rate of decline was the least marked since the downturn began in June.

New orders have been dropping in each month since April, with the latest data showing a sharp decline in new work, with the rate of contraction the fastest since March 2009. Once again, respondents suggested that weak demand conditions had led to a lack of tender opportunities and strong competition for new work.

However, employment trends were relatively resilient during August, with the latest survey showing just a marginal drop in staffing levels.

Softer demand for construction products and materials has helped to alleviate pressure on supply chains, with delivery delays from vendors among the least widespread for three years. Although demand for products is declining alongside order numbers.

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply commented: “The sector fell deeper into contraction as continuing uncertainty and a weakened UK economy took a sizeable bite out of this month’s construction activity. Inevitably business confidence followed suit, dropping like a brick to its worst since December 2008 and close to the lowest depth seen in the previous recession.

“As Brexit creeps closer and confusion still reigns, this will undoubtedly heap more pressure on the UK Government to create much-needed clarity in the market. The commercial sector particularly has been devastated by reluctant clients fearful of taking a wrong turn in a confusing landscape and delaying project starts, resulting in the fastest drop in new orders since March 2009.

“The reality is, if a revival of confidence and a flood of new orders return to the construction sector in the coming weeks, much like a large tanker turning in a dock, there is little room for the sector to improve in the last quarter of the year. It’s likely September’s data will be even more discouraging

Mark Robinson, Scape Group chief executive, said: “Today’s data paints a gloomy picture of the industry. The problem is that both the public and private sector are delaying spending in the run-up to the Brexit crunch date and business optimism has been knocked down to levels not seen since towards the end of the 2007 recession.

“The bad news is that the outlook is likely to deteriorate further in the coming weeks. However, this week’s spending review provides the Government with an opportunity to inject a feel-good feeling back into business. UK plc needs bold decision making, clear commitments, and guaranteed funding. Especially in a no-deal scenario.”

“But, unless the Chancellor pulls something out of the bag, the industry will be holding its breath for a Brexit bounce after October 31st. That could help turn things around by the end of the year.

“On a positive note, it is promising to see that a serious loss in momentum has not affected employment trends – although that might have a lot to do with the ‘Builder Brexodus’ of EU workers heading home. Despite domestic political uncertainty, we continue to need new schools, roads and hospitals. Business will brighten up again, and we must have the manpower in place to build for when it does.”

Gareth Belsham, director at the national property consultancy and surveyors Naismiths, commented: “The flow of new orders has dried up from a drip to a desert.

“We’re fast approaching the critical point where the pipeline of new work isn’t close to keeping up with the pace at which projects are being completed.

“This worsening shortfall is slicing into contractors’ margins and decimating confidence. Little wonder that business sentiment has slumped to its lowest level since the dark days of 2008.

“While the pain is being felt most acutely in commercial sector construction, the residential sector is also retreating into its shell.

“With housebuilders’ ability to mitigate the weakness elsewhere now gone, the mood on the frontline is getting steadily bleaker.

“Finance remains cheap and plentiful, with several challenger banks stepping up to keep developers’ wheels turning. But the brutal truth is many investors have decided to sit on their hands until Britain’s political paralysis ends.

“Whether the Brexit endgame brings an election, a ‘no-deal’ or both remains largely moot. For now all the construction industry can do is to batten down the hatches, complete existing projects and retain its capability in the hope that the final months of the year see an unblocking of three years of deferred investment.”

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