Collapse in Construction PMI Data Signals Start to the Recession Many are now Forecasting

The UK construction sector unexpectedly declined in June; heralding the start of what some analysts believe will be a recession that will last for three quarters.

UK construction slipped into reverse in June according to the latest data from the CIPS and Markit.

The June Construction PMI reading of 46 shows a contraction on par with the declines witnessed in June 2009, when the UK was last falling into recession.

The report said “gloom and fragility” had descended on the sector which saw the steepest drop in new orders since December 2012.

An unwillingness amongst investors to commit to new projects ahead of the EU referendum confirm just what a hit the event has had.

We would expect the deliver of a Brexit vote to really hit activity in July and over coming months.

Such expectations as these are why the UK is forecast to slip into recession once more.

Bank of America Merrill Lynch have today communicated to clients that they are forecasting the UK economy to slip into reverse for three consecutive quarters.

The technical definition of a recession requires two consecutive quarters of GDP contraction.

“The UK is, in our view, set for a prolonged period of uncertainty and volatility. We forecast a mild recession, higher inflation, and BoE rate cuts. We see the risks skewed towards worse growth outcomes than our central case,” says Robert Wood at Bank of America Merrill Lynch Global Research in London.

BofA now expect a three quarter long, mild, recession.

Analysts look for GDP growth of -0.1% in 3Q-1Q 17 with a gradual pick-up after as uncertainty eases.

Calendar year growth forecasts have been cut to 1.4% in 2016 and 0.2% in 2017, from 2.5% for both years in their year-ahead outlook.

“Heightened uncertainty encourages firms and households to delay big ticket purchases, which is what drives the growth downturn we expect. The degree of uncertainty we modelled cut 2.5% off our GDP growth forecast over the next 12 months,” says Wood.

Neville Hill at Credit Suisse says his firm is predicting a shallow recession in the UK in the second half of the year, with GDP falling by just over 1%.

“That should be driven by a halt in business investment as firms react to the uncertainty relating to triggered by the vote; and a squeeze in consumer spending as a consequence of currency depreciation and higher inflation,” says Hill.

Credit Suisse have cut GDP forecast for this year to 1.0% from 1.8% and our 2017 forecast to -1.0% from 2.3%.

“The UK has taken a significant step back from globalisation. That’s a trend gaining political support across the west. Such a significant secular shift has the potential to have substantial implications for growth, corporate profits and asset prices in the medium term,” says Hill.

Investment bank JP Morgan have also revealed their latest post-Brexit forecasts.

A look at the GDP numbers shows that while downgrades have been made, two successive quarters of negative growth are seen.

Therefore, technically at least, the UK is not expected to fall into recession

Third quarter 2016 GDP growth remains at +1% however the final quarter's growth is downgraded to 0.5%.

The first quarter for 2017 is also downgraded to 1%.