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Construction output declines in May signalling further slowdown

The ONS recently released construction output figures for May. Therefore, the data refers to the period before the EU referendum. According to the latest release, output in the construction industry declined 2.1% compared to April. This compares with an increase of 2.8% reported in the previous month. Monthly data, however, tends to be volatile, which makes it difficult to determine if it is indicating an underlying trend in the industry.

Taking the year-to-date data (January to May), construction output was 0.4% lower than a year earlier, with growth in private housing (up 8.0% compared to the corresponding period a year earlier), whilst output in the commercial sector increased 3.1% year-to-date.

On the contrary, public housebuilding was the weakest in the year to May, with output reporting a double-digit contraction of 22.4%, compared to the same period a year earlier. Similarly, output in the industrial and infrastructure sectors contracted in the year to May.

The weakness in the industry was likely to have been caused by pre-referendum uncertainty, which has been mirrored in various industry surveys such as the Markit/CIPS PMI, which reported “widespread delays to investment decisions” and “housing market jitters”. In its latest release, the Markit/CIPS for construction was reported at 46.0 in June, down from 51.2 in May. The reading was below the no-change mark of 50, indicating that construction activity contracted for the first time since April 2013.

The CPA State of Trade Survey for 2016 Q2 reflected similar pre-referendum uncertainty weighing down on sentiment. 13% of heavy side manufacturers anticipated a fall in sales over the next quarter, with a zero balance recorded on the light side. Similarly, expectations for sales growth over the next 12 months by product manufacturers waned.

Beyond the latest figures, it is also worth noting the revisions made by ONS. ONS made revisions to historical data for the period 2010 to 2015 reflecting the incorporation of late data and re-referencing indices to the year 2013, in line with the national accounts. Given these revisions, construction output now expanded by 4.2% in 2015, rather than 3.4%.

Overall, following the outcome of a Brexit, political instability, as well as delays in formally invoking article 50, which, once triggered will open a two-year window for negotiations with EU members, suggests that uncertainty is likely to be prolonged for some time to come. As a result, further delays in decision-making by firms are unlikely to be ruled out. Consequently, it is likely that such behaviour across the industry will continue to weigh on construction activity in the medium-term. Furthermore, with the official data suggesting that the construction industry was already experiencing a contraction in activity before the vote, we’d need to see an (unlikely) acceleration in growth in post-referendum activity.

By Amandeep Bahra at 18 Jul 2016, 14:53 PM

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