Brexit 'blight' blamed as recession looms for construction sector

News at Jubb & Co | 03/10/2017

Britain's construction sector slumped unexpectedly last month as new work dried up amid a "Brexit blight" of uncertainty, according to closely-watched economic data.


Figures from the IHS Markit/CIPS purchasing managers' index (PMI) suggested the sector was heading for a second quarter of decline in a row - effectively entering recession, economists said.


They came as, separately, the Bank of England warned that Brexit could pose a risk to the ability of British companies to borrow from European banks.


The PMI data showed a reading of 48.1 for the construction sector in September, where the 50-mark separates growth and contraction.


It was the first time the index had recorded the sector shrinking since last summer, a time when businesses were digesting the immediate impact of the EU referendum.


Tim Moore, associate director at IHS Markit, said: "A shortfall of new work to replace completed projects has started to weigh heavily on the UK construction sector."


Duncan Brock, director of customer relationships at the Chartered Institute of Procurement and Supply (CIPS), said firms "pointed to obstructive economic conditions and the Brexit blight of uncertainty, freezing clients into indecision over new projects".


Separate PMI data from manufacturing on Monday had pointed to slowing growth in that sector.


The Bank of England lowered the base rate of interest after the UKs Brexit vote in 2016


Within construction, commercial work and civil engineering both saw marked declines last month while growth in house building slowed, partly blamed on anxiety over a possible coming interest rate rise.


Business optimism also fell and costs rose as the weak pound continued to put upward pressure on import prices.


Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "The construction sector is entering its own recession, as Brexit risk dampens demand for commercial buildings and as housing demand cools."


Wider economic growth so far this year has slowed to the weakest pace since 2012, with consumers bearing the brunt of a rise in inflation caused by the pound's tumble since the Brexit vote.


Construction - which makes up 6% of the economy - has also been hit.


Official data shows it shrank by 0.5% in the second quarter and the latest PMI data suggests another decline in the July-September period, which would effectively mean recession for the sector.


Meanwhile, a record of the latest meeting of the Bank of England's Financial Policy Committee (FPC) flagged further risks as Brexit looms.


It said that, without an agreement in place for when Britain leaves the EU, European banks with branches in the UK would need to start applying for new authorisations from regulators within months to carry on operating.


The Bank said a number of these banks - which represent about 10% of lending to UK companies - were "not sufficiently focused" on addressing the potential disruption.