UK construction PMI comes crashing back down to earth -UPDATE

Date: Tuesday 03 Jul 2012

-Markit highlights fall in expectations index
-Very sharp drop in new orders
-Civil engineering sees largest drop in activity levels
-Stocks at suppliers remain low
-June PMI closes gap with official estimates of sector output

The Markit/CIPS purchasing managers´ index (PMI) for the month of June has come in at 48.2, down from 54.4 in May.

The consensus estimate had been for a reading of 53.0.

Despite the very large fall seen in the data –the largest since February 2009- economists at Barclays have to a large extent brushed it off, indicating that it simply serves to bring the PMI back in-line with official estimates of growth in the sector.

Thus, Barclays points out that, “although the PMI reading was significantly weaker than expected, we would not put too much weight on today's data, not least because the strength of the construction PMI over the past few months has been rather puzzling. The official data showed construction output fell by 4.9% quarter-on-quarter in quarter one and we expect a similarly large fall of 3.4% for quarter two - both painting a worse picture than the PMI survey has so far.

Furthermore, we view the recent deterioration in the housing and the civil engineering components as beginning to reflect a more accurate picture of the poor performance of the housing market, as well as of the fall in government infrastructure investment.”

Similarly, Tim Moore, economist at Markit, says that allowance must be made for the impact which the extra bank holiday and inclement weather had. “However, these temporary factors should not be overplayed, as the latest figures reveal worsening underlying business conditions within the sector,” he adds.

Civil engineering and housing activity were the worst performing broad areas of the construction sector. The civil engineering sub-index reported the sharpest fall, of 8.1 points to 44.7. Commercial activity meanwhile increased only marginally, and at the slowest pace for 28 months.

As well, the new orders sub-index fell sharply to 47.9 (from 53.9 previously), consistent with falling new orders for the first time since September 2011 and the weakest reading since May 2009. The business expectations sub-index, nonetheless, fell only marginally to 56.5 (from 57.2 previously) - although the degree of positive sentiment remained below the long-run survey average, Barclays also points out.

For their part, economists at Markit highlighted the fall in expectations, given that in previous instances where activity had been dented by extraordinary factors firms had seemed to “see through” the weakness.

Despite all of the above, average cost burdens increased in June for the twenty-ninth successive month.

Lastly, Dr. Howard Archer, chief UK & European Economist at IHS Global Insight, comments that, “(…) so there is now a very real danger that construction output contracted again in the second quarter after plunging 4.9% quarter-on-quarter in the first quarter, when it contributed 0.4 percentage point to overall GDP contraction of 0.3% quarter-on-quarter.”

AB

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