Construction sector continued to deteriorate in August

Operating conditions in the UK construction economy continued to deteriorate in August. The weakening health of the sector reflected declines in activity levels, new orders, employment and purchases, as the industry continued to suffer the combined effects of the credit crisis, widespread input price inflation and the wider global economic downturn.

Activity levels fell across all three sub-sectors of the UK construction economy in August, albeit at slower rates than in July. Of the three, by far the most striking was the rapid contraction in housing construction. In contrast, civil engineering performed the best, posting only a modest decline in business activity.

Lower overall activity levels were attributed by the majority of respondents to poor demand conditions creating fewer opportunities to tender.

With supply outstripping demand for construction work, competition to win new orders was high, driving down the values of tenders and making it difficult to secure contracts. Average incoming new work to UK constructors therefore fell at a substantial pace, albeit one slower than the previous month.

With new orders and activity levels falling, there was little appetite to invest in either raw materials or workers. Purchasing activity, staffing levels and sub-contractor usage were therefore reduced further – although at weaker rates than in July. As demand for raw materials softened, average vendor performance improved solidly. Lead times have now shortened for the past four months.

Adding to the overall gloomy picture, input price inflation, although slower than in July, persisted at a high level with the seasonally adjusted Input Prices Index posting a reading of 78.5. Increased raw material and fuel costs were blamed for the latest inflation. Sub-contractors also raised their charges slightly, despite falling demand for their services and their increased availability.

"UK constructors are still feeling the bite of the credit crunch," said Director of Professional Practice at CIPS Roy Ayliffe. "Although the latest data suggest that the rate of contraction in the sector is easing, conditions remain relatively depressed overall. With far fewer new business opportunities to pitch for, purchasing managers said competition between firms intensified which in turn lowered the values of tenders.

"Housing was again the Achilles Heel of the construction sector, as August data signalled nine consecutive months of housebuilding decline. In an attempt to cope with the onslaught of rising prices, difficult trading conditions and narrowing confidence, purchasing managers were forced to further reduce levels of procurement activity, while more jobs were axed," he said.

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