Construction In Contraction Over Imminent Brexit

How worried should we be over the bad news from PMI?
It would be faintly ridiculous to claim that the Brexit deadline has quietly crept up on Britain much faster than we could ever have expected.
It’s probably more accurate to suggest that for the best part of three long years, we’ve been repeatedly hammered over the head with endless speculation, rumours, debate and wails of despair that have stretched our patience beyond breaking point.
But if the current schedule is to be believed, the clock is now finally counting down the final few weeks before Britain leaves the EU.
And on the surface, the latest news from the construction industry is far from promising.

Falling Figures
According to the IHS Markit/CIPS UK Construction Purchasing Manager’s Index (or PMI), output in the UK’s construction sector has fallen to its lowest level in nearly a year.
Following a 10-month period of sustained growth and a PMI reading of 50.6 for January, economists were predicting a very slight drop to 50.5 for February’s figures.
In fact, the PMI reading has slumped significantly to 49.5.
As this falls below the 50.0 threshold, the reading indicates an official state of contraction for the industry.
When we dig a little deeper into the stats, the drop becomes even more significant.
This may technically be the lowest level of output for nearly a year, but it’s worth bearing in mind that the last time we dipped this low in March 2018, it had nothing to do with economic concerns.
It was more to do with the fact that construction had temporarily ground to a halt as Britain was battered by the severe weather disruption of ‘The Beast From The East’.
So taking wildly unseasonal snowfall out of the equation, this is actually the lowest reading since way back in September 2017.

So What Are the Reasons Behind this Sharp Drop in Activity?
Those two killer words ‘Brexit Uncertainty’ appear to have a led to subdued demand and a slow-down in crucial decision-making for commercial building and engineering projects.
Many building companies are reporting that it’s taking far longer to agree sales with clients who seem to be adopting a ‘wait and see’ approach.
The situation has not been helped by a relative soft patch for new orders at the beginning of 2019, and a stockpiling by British manufacturers which has had a detrimental impact on transport availability and supplier capacity.
Commercial building has suffered the biggest blow as anxieties over a potential no-deal Brexit continue to have an adverse effect on any natural demand for new offices, shops and commercial property.
Residential work is the strongest-performing sector and has actually recorded growth for the 13th consecutive month.
However, before we get too carried away with the celebrations, it’s a pretty modest and some might say disappointing growth rate which is far from enough to counterbalance the recorded declines in commercial and civil engineering activity.
Tim Moore, the economics associate director at HIS Markit, reports that “Risk aversion in the commercial sub-category has exerted a downward influence on workloads throughout the year so far. This reflects softer business spending on fixed assets such as industrial units, offices and retail space.
“The fall in commercial work therefore hints at a further slide in domestic business investment during the first quarter, continuing the declines seen in 2018.
“There were also reports that the more fragile housing market confidence has begun to act as a brake on residential work, which adds to signs that house building has lost momentum since the end of last year. This leaves the construction sector increasingly reliant on large-scale infrastructure projects for growth over the year ahead.”

Which Way Now?
There’s no sugar-coating the fact that the construction industry is currently facing a tough time.
Construction firms are hiring staff at the slowest rate since the immediate aftermath of the referendum result nearly three years ago.
This year’s soft patch and delays in decision-making will inevitably create a knock-on effect in the short-term with worrying gaps in workloads to face.
As the prospect of a potential no-deal Brexit looms ever closer, many companies may currently be initiating a state of survival mode.
The news doesn’t seem quite so grim in the North, as London is expected to bear the brunt of a no-deal Brexit.
But Max Jones from Lloyds Bank’s Infrastructure and Construction Team points out that “While the suggestion is that regional cities like Birmingham, Manchester and Edinburgh are more buoyant, it’s not clear that there is enough activity to pick up the slack from the capital.”
However, it’s worth remembering that ‘Brexit Uncertainty’ is a world away from ‘No-Deal Certainty’.
There remains at least a degree of hope and strength for the future.
The current figures reflect a state of anxiety over what might happen in just a few weeks from now, but the shape of things to come could paint a very different picture if the industry’s worst fears are not realised.
Even a widely-tipped extension to the Brexit process, while delaying the ultimate outcome and creating more uncertainty, could alleviate the immediate threat of a no-deal Brexit and pave the way for a more positive outcome in the long term.
“Wait and see” may be the approach that is currently slowing down the sector but the good news is that there’s certainly not long to wait now…

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