UK construction companies suffered a renewed fall in new business during December, after a modest increase recorded in November proved to be short-lived, highlighting the continuing challenges facing the sector.
This latest sign of weakness in the industry, revealed by the Chartered Institute of Purchasing and Supply’s (CIPS) new monthly survey, was among the factors which weighed on the pound yesterday.
Last night it was trading at around $1.5985 - down about one-and-a-quarter cents on its close in London on Monday against the dollar.
Sterling also slipped against the euro. The single currency was last night trading around 89.8p - up about one-quarter of a penny on its Monday close.
CIPS reported yesterday that the UK construction sector contracted for a 22nd consecutive month in December.
Its activity index for construction stood at 47.1 in December, little changed from 47.0 in November and well below the level of 50 which separates expansion from contraction.
CIPS’ new orders index for the construction sector dropped from 50.6 in November to 48.7 in December - to signal a renewed fall in incoming new business. The rise of this index above the 50 mark in November had, when it was revealed a month ago, raised hopes of better times ahead for the sector but the weak December reading yesterday prompted some renewed concerns about the outlook.
Construction companies told CIPS that clients had reduced budgets for construction work, and that any new offers to tender were “very competitive”.
In spite of the setback on the new-order front, CIPS reported that construction companies remained hopeful that the sector would finally stage a recovery this year.
Construction companies continued to slash workforces at a rapid rate in December as the sector remained stuck in recession. Use of sub-contractors also fell yet again.
The commercial property construction sub-sector suffered a particularly sharp fall in activity in December, according to CIPS’ survey.
Construction activity in the housing sub-sector rose for a fourth consecutive month. However, this recovery in housebuilding activity comes after months of precipitous falls.
The civil engineering sub-sector suffered another further sharp fall in its activity in December, according to CIPS’ latest survey of the construction sector.
David Noble, chief executive officer at CIPS, said: “December was another disappointing month for the UK construction sector. Unlike other parts of the economy, it seems unable to escape the shackles of the recession, as it entered its 22nd successive month of decline.
“Purchasing managers painted a bleak picture as firms suffered from reduced client demand and falls in new business. As a result, contractors are competing aggressively to secure the relatively fewer new contract tenders there are in the market.”
He added: “Though the sector ended the year on a bad note, there are some glimmers of hope. Most significantly, the residential sector showed a marked improvement in activity, with growth indicated for four consecutive months. This suggests that the increase in house prices last year is beginning to have an effect on construction and encouraging new building.
“Purchasing managers also remain confident that 2010 will be a much better year for the construction sector and that it will begin to grow again. However, whether this optimism is based on hope rather than foresight on orders in the pipeline remains to be seen.”
Sarah Ledger, economist at survey compiler Markit, said: “The UK construction sector ended the year with levels of activity still in decline. The rate of contraction slowed considerably during 2009 although, with only one month of increasing new business indicated in that period, activity failed to grow.
“Nonetheless, sentiment over future business activity remained positive, with many construction companies anticipating a recovery in the industry during 2010. Underpinning this, residential construction activity has now increased for four successive months.”
Howard Archer, chief UK economist at consultancy IHS Global Insight, took heart from the fact that the rate of decline in construction activity in December was the second-slowest recorded by CIPS since March 2008.
He said: “The overall impression is that the construction sector is stabilising after enduring a major recession, and it should be helped by the economy probably returning to growth in the fourth quarter of 2009 and hopefully gradually developing recovery over the coming months.”
However, he added: “The construction sector still faces serious obstacles.
“Serious concerns and uncertainties persist over the prospects for the commercial property sector in particular.
“Over the longer term, the construction sector will be hit by the government’s need to significantly rein in its spending for an extended period as this is bound to hit expenditure on infrastructure and public buildings.”
