Post date: Wednesday, 4th July 2012

June reverses prompt industry calls for coalition action

KPMG's Richard Threlfall says the government needs to act now to support UK’s st

KPMG's Richard Threlfall says the government needs to act now to support UK’s struggling construction industry.

Purchasing Managers’ Index (PMI) figures reflecting the sharpest drop in construction output for two-and-a-half years have been met with appeals to the government by numerous industry figures, while the decline being ascribed in some quarters to the double bank holiday in June has been dismissed.

Richard Threlfall, KPMG’s head of infrastructure, building and construction, said: "Today’s disappointing construction figures come as no surprise. We have seen in recent months failures of some of the biggest construction players such as the 150-year-old firm Killby & Gayford. More recently we have seen the equally well-respected construction firm Doyle go into administration.

"This is the start of a new phase in the downturn for the construction industry in the UK, driven by a waning pipeline, evaporating margins and lengthening payment periods. The pressure on the industry is now becoming acute. The government needs to act now to support UK’s struggling construction industry."

Tim Moore, senior economist at Markit and author of the Markit/CIPS Construction PMI to give the index its full title, said: "The UK construction sector moved back into reverse gear in June, with output falling at its fastest pace since the end of 2009 amid a steep decline in civil engineering. A drop in business activity was perhaps inevitable given that the month started with an additional bank holiday and ended with severe weather across large parts of the UK.

"However, these temporary factors should not be overplayed, as the latest figures reveal worsening underlying business conditions within the sector. Construction firms’ assessment of future output dropped to an eight-month low in June, whereas past disruptions, such as heavy snowfall at the start of 2012 and the 2011 Royal Wedding, boosted future expectations as companies anticipated that a catch-up effect would follow.

"New business intakes, meanwhile, dropped at the fastest pace since April 2009, while a lack of work to replace completed projects resulted in falling employment after a three-month period of cautious job hiring."

Chartered Institute of Purchasing & Supply chief executive David Noble said: "The renewed declines in construction output and employment are a reflection of the weakening trend in new orders seen in recent months. The contraction was accompanied by a similar fall in cost inflation, but this is scant consolation for businesses, as the global economy continues to cast a shadow over the industry.

"Sharp drops in new civil engineering and housing activity were almost matched by the slowdown in commercial activity. The anomaly of the double bank holiday at the start of the month will have had some negative impact but the underlying sluggishness throughout the industry could point towards a much softer period heading into the third quarter.

"Added to this is concern about the ability of firms to respond quickly to any rise in new orders. Delivery times for inputs lengthened again in June due to the low stocks reportedly being held by suppliers, highlighting a further worry for the health of the sector."

The British Chambers of Commerce (BCC) warned that its own economic survey of around 8,000 businesses suggested only marginal growth in the second quarter, and the PMI index’s steep drop increased the danger of a third consecutive quarter of contraction.

"While domestic growth continues to bump along the bottom, the silver lining is an increase in firms looking for export opportunities, and in many cases, with countries outside Europe," said John Longworth, director general of the BCC.

"Growth cannot wait. The government must take an imaginative and brave approach to stimulating the economy and helping businesses thrive," Longworth added.

The BCC predicts economic growth of just 0.1% for 2012 but say it will pick up to 1.9% in 2013 on an upturn in exports to countries outside Europe. Businesses’ confidence was still lower than before the crisis in 2007, and plans by manufacturers to invest in plant and machinery fell, the BCC’s survey showed.

In anticipating further quantitative easing, Michael Saunders, UK economist at Citi said: "The latest quarterly economic survey from the BCC suggests that the economy remains sluggish. The activity readings are not as weak as shown by the official GDP data, but do suggest that the economy lacks momentum."

Saunders added that effective interest rates for loans to small businesses as well as for mortgages kept rising, despite the Bank of England’s current monetary policy, adding another constraint to growth.

"There is now a very real danger that construction output contracted again in the second quarter," said Howard Archer at IHS Global Insight.

Meanwhile, Ross Walker a Royal Bank of Scotland economist, bemoaned the continuing crisis in credit: "It’s just more of the same. Why would anyone expect anything else, the household sector is up to its eyeballs in debt, it’s trying to de-leverage and this process is going to run for several more years."

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