Construction output tumbles at fastest pace since 2009 but sterling gains ground

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Activity in the construction sector is shrinking at its fastest pace in seven years, but has still managed to beat some exceptionally gloomy forecasts, helping the pound climb against the dollar.

The Markit/Chartered Institute of Procurement and Supply (CIPS) survey came in at 45.9 on an index where scores below 50 signify contraction. This was only slightly down on the score of 46 recorded in June – which was already a three-year low – and marginally above expectations. 

So dire had the expectations for the survey been, the pound actually rose on the news, climbing 0.4 per cent against the dollar to $1.3229.

However, employment in the construction industry is estimated to have fallen for the first time in three years as rates of commercial building collapsed due to uncertainty in the run-up and immediate aftermath of the EU referendum.

Markit said: "The latest reading signalled the fastest overall decline in construction output since June 2009. This largely reflected the steepest fall in commercial building for over six-and-a-half years, alongside a drop in civil engineering activity for the first time in 2016."

Tim Moore, a senior economist at Markit added: "The figures confirm a clear loss of momentum since the second quarter of 2016, led by a steep and accelerated decline in commercial building."

Brexit uncertainty was cited overwhelmingly as the main reason for the reported tail-off in new projects, though Markit did say "there were reports … suggesting that demand patterns had been more resilient than expected, and some firms linked new enquiries from international clients to exchange rate depreciation."

Mike Chappell, managing director for construction at Lloyds Bank, said many construction firms were fearing a recession, branding Brexit an "unwelcome distraction".

Read more: Can we trust official construction numbers?

He added, however, the sector is in better shape than during the financial crisis and the health of many firms was robust. "All this is not to say that the industry is completely relaxed. Those with exposure to London will be particularly concerned should the commercial property market suffer a significant slowdown.

“Nevertheless, even if construction firms are nervous in the current climate, the hope is that the sector is robust enough to ride out any short-term disruption in the wider economy.”

PMI figures have come to be interpreted as one of the leading indicators of the state of the UK economy after the referendum, as they are a reliable forward-looking measure of both confidence and activity, unlike other official statistics such as unemployment, inflation and GDP growth, which still refer to the pre-vote period. 

Numbers out yesterday for the manufacturing sector were worse than expected and pointed to a noticeable downturn for the industry in the third quarter of the year.