Photographer: Matthew Lloyd/Bloomberg

U.K. Construction Set for 2Q Contraction After Decline in May

  • Building work falls 2.1% in May, double estimate of economists
  • Surveys point to dire June as projects axed before Brexit vote

U.K. construction is on course to shrink for a second straight quarter and economists are warning of worse to come after Britain voted to leave the European Union.

Building output fell 2.1 percent in May, almost double the decline forecast in a Bloomberg survey of economists, figures from the Office for National Statistics showed Friday. There were falls in almost every category of work, with private housing down the most in more than a year.

It means production will contract in the second quarter unless June sees a gain of 1.9 percent, a seemingly impossible feat if the latest surveys of the sector are correct. Construction was shrinking even before the referendum on EU membership, with Markit Economics’ purchasing-management index tumbling to a seven-year low in June.

With Brexit set to hit building firms hit particularly hard, there is speculation that new Chancellor of the Exchequer Philip Hammond may bring forward government infrastructure spending as part of a coordinated effort with the Bank of England to prevent the economy from sliding into recession. Real-estate investment trusts and homebuilders are among the worst-performers since the June 23 vote, with shares of Barratt Developments Plc down almost 30 percent.

Weaker Housebuilding

May’s decline in construction output undid much of 2.8 percent gain seen in April. Private new housing fell 3.5 percent, the most since February 2015, and private industrial work excluding infrastructure dropped 9.6 percent. Infrastructure, the only category to improve, gained just 0.6 percent.

Total new work fell 2.6 percent, while repairs and maintenance slid 1.4 percent. In the latest three months, construction fell 2.1 percent from the equivalent period through February.

“Going forward, prospects look worse, for the short term at least,” said Chris Williamson, chief economist at Markit. “The drop in activity seen in the June construction PMI was fueled by uncertainty about the mere possibility off Brexit. The reality of the U.K. leaving the EU and the associated heightened uncertainty, especially in relation to commercial property and housing investment, is therefore likely to cause further stress in coming months.”

Flash Estimate

Markit said on Thursday it plans to publish a one-time flash PMI survey on July 22 “to help provide clarity on the potential impact” of Brexit. The estimate will be based on more than 70 percent of the usual replies to its regular monthly surveys.

With construction accounting for just 5.9 percent of gross domestic product, the sector may have little impact on overall growth, which many economists say probably accelerated in the second quarter on the back of services and resilient industrial production.

Separate figures released by the ONS showed export volumes fell 11 percent in May from April, the biggest decline July 2006. Import volumes declined 6.4 percent, the most since August 2014. The figures are late additions to trade statistics published earlier this month.

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