UK Construction Firms Struggled Again in November as Political Uncertainty Takes Toll

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- Construction PMI rebounds in November as slowdown moderates.

- But new orders still in decline amid elevated political uncertainty.

- Civil engineering and commercial construction firms still laggards.

- Comes after IHS flash PMIs pointed to Q4 UK economic contraction.

The UK construction industry remained mired in a downturn in November, according to the latest IHS Markit PMI survey, with uncertainty over the December election outcome leading to inertia in client boardrooms that's hit overall activity in the sector.

IHS Markit's construction PMI rose from 44.2 to 45.5 in November when markets were looking for an increase to only 44.5. However, and despite the beat against expectations, the index remains a long way beneath the 50 threshold that marks the difference between industry expansion and contraction. 

Civil engineering firms were again the worst performers last month after having seen the fastest declines in output although activity among commercial construction firms was also weak. An uptick in residential construction activity did however, temper the decline in the overall PMI. 

PIM surveys measure changes in industry activity by asking respondents to rate conditions for new orders, production, hiring intentions, prices and inventories. A number above 50.0 indicates industry expansion while a number below 50 is suggestive of contraction. The survey results often correlate with official measures of output, although they can often be wide of the mark too.

New work orders declined again in November, with construction firms having told IHS Markit that clients were deferring decisions to go ahead with projects amid elevated uncertainty over the outlook for government policy ahead of the December 12 election. However, some firms also reportedly said they'd been frustrated by unusually wet weather for that month. 

"The construction sector should benefit from much stronger growth in public sector net investment in the fiscal year beginning in April, whichever party wins the next election. In addition, the recent fall in mortgage rates should start to stimulate private housing investment next year.  Granted, Brexit uncertainty won’t go away entirely if the Withdrawal Agreement is ratified before the end of January. But firms solely focussed on the domestic market likely will start to invest again, when the threat of a no-deal Brexit recession is taken off the table. Accordingly, the construction sector should be back on its feet mid-way through next year," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

The construction industry has struggled since the June 2016 Brexit referendum, which has hit the commercial construction sector particularly hard, leading the industry to fall into recession in 2017. Output contracted for three consecutive quarters that year before seeing only a tepid and short-lived recovery in 2018, which has since unwound as the Brexit saga rolls on.

Meanwhile, the broader economy's fortune has been little better, even if the construction sector's contribution to it is limited. GDP growth contracted by 0.1% in the second quarter after rising 0.6% during the first three months of the year, while the third quarter brought an expansion of only 0.3%. Consensus envisages GDP growth of 1.3% for 2019 overall, although that now looks to be an ambitious target in the wake of the third quarter numbers.

IHS Markit released its inaugural 'flash' PMI surveys of the manufacturing, construction and services sectors last month, which pointed to another contraction in the final quarter for the UK economy. However, economists have been reluctant to take the surveys as seriously as they once might have given how they've persistently overstated the impact that political uncertainty has on the economy in recent years.

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