Monthly construction figures show biggest fall in activity in two and a half years

The Construction Purchasing Managers' Index (PMI) (3-page / 82KB PDF), by analysts Markit and the Chartered Institute of Purchasing and Supply, recorded a score of 48.2 in June, down from 54.4 in May. The fall in this figure over the course of the month was also the sharpest since February 2009, which the analysts said signalled a "marked loss of momentum" following previous "solid expansion". A PMI score above 50 indicates growth while a score below 50 indicates contraction.

"Anecdotal evidence attributed part of the decline to the extra bank holiday in June, but panellists also widely commented on weaker underlying business conditions," the report said. "Civil engineering and housing activity were the worst performing broad areas of the construction sector, with both seeing a drop in output for the first time since the weather-affected downturn in January."

Infrastructure law expert Graham Robinson of Pinsent Masons, the law firm behind Out-Law.com, said that the figures showed that construction output had fallen by almost 5% over the last three months, while new orders had fallen by over 7%.

"In some sectors, such as infrastructure, construction output has fallen by 17% since the last quarter, calling into question the Government's ambitions of investment in infrastructure to stimulate growth in the UK economy," he said. "A drop in orders in the housing sector of almost 8% signals that housing, traditionally one of the biggest sectors for UK construction, is not yet in a full recovery mode. New orders for infrastructure, a forward indicator for growth in infrastructure, have also fallen by over 13% - signalling that a further contraction in output is yet to come."

He said that firm policy announcements were needed by the Government in order to generate growth.

"The lack of policy decision by the Government on infrastructure funding mechanisms, and the lack of appetite by UK pension funds to fund new greenfield infrastructure assets, is leading to a vacuum in work for a beleaguered construction industry," he said.

While the firms surveyed were mainly positive that business activity would increase over the next 12 months, Markit said, the "degree of positive sentiment" was "well below" the survey's average, with the lowest reading since October 2011. The PMI data also showed a "moderate drop" in the orders received by construction firms following eight months of expansion, which respondents pinned on "uncertainties about the economic outlook" as well as disruption related to the extra Diamond Jubilee bank holiday. In addition, employment levels reported by the surveyed firms dropped for the first time since February.

The report's author, Tim Moore, said that although some drop in business activity was "inevitable" following the bank holiday and reports of the wettest June on record, the role of these "temporary factors" should not be overstated.

"The latest figures reveal worsening underlying business conditions within the sector," he said. "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."