U.K. Construction Industry Returns to the Doldrums as Economist Warns of Fresh Recession

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The latest IHS Markit survey showed the beleaguered U.K. construction industry returning to the doldrums in September, prompting some economists to suggest on Tuesday that the sector could soon return to recession. 

September's IHS Markit construction PMI came in at 52.1, down from 52.9 back in August, when markets had looked for a decline to only 52.8. 

"The drop in the construction PMI to a six-month low in September indicates that the sector’s revival over the summer largely was driven by the displacement of activity from earlier in the year due to the bad weather. ," says Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics.

A broad-based decline in momentum across all three sub-sectors of the industry was responsible for the downturn, which pushed the business optimism component of the index to its second lowest level since February 2013. 

The civil engineering segment was the worst performer in September, with the ongoing decline in activity gathering steam during the month, while the rate of growth in the housebuilding segment declined when compared with that of August. 

However, and on the upside, the rate of new order growth among construction businesses picked up to its fastest pace since December 2016 during the recent month, with firms attributing the increase to resilient client demand and an increase in invitations to tender for new work.  

"The sector now is treading water; a 52 level for the PMI historically has separated expansion from contraction," Tombs adds. "We doubt that the construction sector will make a positive contribution to GDP growth over the next few quarters."

PMI surveys measure changes in industry activity by asking respondents to rate conditions for employment, production, new orders, prices, deliveries and inventories. A number above the 50.0 level indicates industry expansion while a number below is consistent with contraction.

Markets care about the PMI data because, covering the UK's three largest commercial sectors, they are an important indicator of momentum within the economy. And economic growth has direct bearing on the rate of inflation and it is consumer price pressures that dictate where interest rates, which are the raison d'être for most moves in exchange rates, will go next.

The construction industry has been a drag on UK economic growth during the last year and, according to Office for National Statistics data released last week, shrank by -1.6%% during the first quarter.

The industry is estimated to have expanded by 0.8% during the second quarter, although the ONS has revised its first quarter number twice so far, suggesting the latest data could also be liable to change.

The slowdown in the industry, brought about by bad weather at the end of February and beginning of March as well as a generally weak business environment for the sector, weighed on the broader economy at the start of the year.

U.K. GDP growth slowed from 0.4% at the end of 2017 to just 0.1% for the three months to the end of March, according to the ONS update published last week. Consensus is for U.K. growth to have slowed to just 1.3% for 2018 as a whole, down from 1.7% in 2017.

"There have been encouraging signs that activity has strengthened at the start of Q3, with three-month GDP growth rising from 0.4% in Q2 to 0.6% in July – a little above the Bank of England’s 0.5% growth projection for Q3 as a whole. So despite today’s figures, we remain cautiously upbeat about the economy’s near-term prospects," says Ruth Gregory, an economist at Capital Economics, in a note to clients Friday.

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