‘Sustained decline’ is the continuing picture this month, although the construction output index figure is up from October
Contractors battle for projects with low pricing
Another month/another set of construction industry output figures, and it will be no surprise to any of our readers that there are few reasons to feel particularly optimistic as we head towards the end of 2019.
The most recent update from IHS Markit/CIPS shows a fall in UK construction output for the sixth successive month.
If there was any good news to be found in the latest figures, it was that the index figure of 44.2 was up from the previous month’s 43.3, meaning that the rate of fall was slower than had been seen in previous months. Also, despite a drop in new orders for the seventh month in a row, the actual rate of decline was at its lowest since July.
However, the accompanying commentary described the situation as a ‘sustained decline’ which is hardly a surprise following another month of UK political limbo in the UK. The latest Brexit deadline of 31st October has passed, once again, without the country leaving the EU. This has prolonged a mood of uncertainty in all areas of the economy, including construction.
Another worrying takeaway from this month’s output commentary was that construction firms are continuing to reduce their workforce numbers because projects are not getting started. Earlier in the year, there had been indications that some firms had been holding on to valuable personnel, in the hope that the situation would improve. Clearly this is a situation which cannot be sustained indefinitely.
A damp October also affects activity
Survey respondents also cited the extremely wet weather in October as having had a (literally) dampening effect on activity.
We have seen in the past how inclement weather can have a major impact on activity so it is particularly unwelcome at an already challenging time.
It was also noted that the current feeling of uncertainty and consequent lack of new projects had led to increased competition across the sector as well as price discounting in order to secure any attractive contracts.
This was referred to in a recent article from the Construction Index as ‘suicide bidding’ meaning that contractors have been prepared to take on work which could ultimately see little or sometimes no profit in order to keep active. Building.co.uk referred to ‘panicked’ firms using ‘cut throat bidding’ in an effort to stockpile contracts.
Stagnant Civil Engineering
Civil engineering saw the fastest pace of decline in this month’s figures, echoing wider concerns about the status of a number of the UK’s highest profile infrastructure projects.
As highlighted in an article in the Guardian online, the current political impasse over Brexit means that these major infrastructure projects are simply not a focus for the government in the current environment.
As we have mentioned in previous blogs, the major HS2 project is on hold and under review, and there is ongoing uncertainty over other major projects like the third runway at Heathrow.
The forthcoming UK General Election on 12th December means that no new decisions will be made until the elected government is firmly in place.
The status of the UK’s exit from the EU (currently) scheduled for 31st of January is similarly precarious.
This date, the manner of departure, and indeed whether it happens at all are highly dependent on the make-up of the new government, which will be formed this year but is unlikely to be getting down to any very serious business until 2020.
In another survey recently published by RICS there are signs of unease in the Commercial property sector. If you remember, we looked at the latest update from RICS last month in relation to the residential housing market.
It is helpful to keep an eye on the property market in the UK as this is directly linked to stimulus to build more housing and commercial buildings.
This latest report showed the highest number of respondents who felt that the commercial property market is in a downturn phase. This was despite the fact that the underlying view is that capital value expectations remain positive over the longer term. Another indication that the economy is basically waiting for a clearer idea of the future across all sectors.
Anecdotal evidence implies that the Brexit situation has had a similar impact on commercial property, with general hesitancy leading to ongoing caution and an unwillingness to commit to big projects which involve major expenditure. The commercial sector is similar to the civil engineering sector in that major investment is required before projects can progress.
‘All eyes’ are currently on the December general election – with the fervent hope that the emerging new administration will be able to provide a clear future direction. Along with most industry players, we continue to watch this space to find out what happens next.
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