Why has UK construction activity fallen over summer?

Throughout June and July, the UK’s construction industry experienced a rapid drop in activity, recording its fastest fall in seven years. 

The Markit/CIPS construction purchasing managers’ index (PMI) dropped to 46 in June and 45.9 in July, signalling shrinkage. Anything over 50 on the scale demonstrates growth and even though the PMI didn’t fall as low as the 44 forecast beforehand, the fall in activity was still not good news for the sector.  

Brexit Effect

The Brexit announcement has undoubtedly been the main factor that has led to a fall in the UK’s construction. The uncertainty in the run up to the UK’s EU membership referendum got the ball in motion for fewer clients to invest in construction, with the somewhat surprising decision by voters to decide to leave the EU decreasing activity. 

As soon as the referendum result was announced, a loss in momentum was expected. Uncertainty in the markets and a weaker pound has seen clients invest a lot less in construction, in anticipation of lower charges. The one positive is that for the most part a lot of clients seem to be waiting to see what happens rather than immediately cancelling projects.      

Risk Aversion and Lower Investment 

Related to Brexit, a lot of clients are investing less in construction as a risk aversion strategy. Given the struggling UK economy and ongoing uncertainty, it is seen as a risk for many companies to currently invest their money into the construction of properties in the UK. 

This has also seen the number of people working within the construction sector drop for the first time in over three years. While the availability of sub-contractors has risen for the first time since September 2012 as the demand for their services weakened. The PMI also recorded the lowest business confidence.   

The Future

The uncertainty looks set to continue surrounding the UK’s economy and this will more than likely be reflected in the construction sector for the foreseeable future. However, a lot of investors and clients in the industry seem to be waiting to see if things do improve. 

In the meantime, construction companies may need to seek out alternative business models and re-evaluating their approach. The Bank of England have also cut interest rates in an attempt to boost business, which will affect construction as well. Hopefully the industry will recover in the near future.