Recession fears grow as construction orders collapse amid Brexit uncertainty

The UK’s construction sector has shrunk for the fourth consecutive month, deepening fears the country could be heading for recession following dismal manufacturing data and an “incredibly disappointing” August for retailers.

New construction orders fell at the fastest pace in more than a decade as uncertainty over Brexit deterred investment in building projects, according to a closely watched snapshot survey.

Business optimism in the sector shrank to its lowest point since December 2008, the Markit/CIPS purchasing managers’ index (PMI) found. Analysts said there was little prospect of the industry recovering in the last quarter of 2019 and September’s data was likely to be even bleaker.

The UK’s manufacturing output slumped to a seven-year low last month as the sector shrank at the fastest rate since 2012, the industry’s PMI showed on Monday.

Economists will be closely watching Wednesday’s data for the services sector, which accounts for about 80 per cent of UK output and posted unexpected growth in July, for an indication as to the health of the wider British economy.

A poor performance for August would raise serious questions about Britain’s ability to bounce back from an overall economic contraction in the second quarter of this year. A second contraction in the current quarter would signal a recession.

The construction sector’s PMI reading for August was a worse-than-expected 45, down from 45.3 in July. A figure below 50 represents contraction.

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: “The sector fell deeper into contraction as continuing uncertainty and a weakened UK economy took a sizeable bite out of this month’s construction activity.

“Inevitably business confidence followed suit, dropping like a brick to its worst since December 2008 and close to the lowest depth seen in the previous recession.

“As Brexit creeps closer and confusion still reigns, this will undoubtedly heap more pressure on the UK government to create much-needed clarity in the market.”

Commercial building projects in particular have been “devastated by reluctant clients fearful of taking a wrong turn in a confusing landscape”, Mr Brock added.

Chris Williamson, chief business economist at IHS Markit, said the August PMIs “raise the likelihood that both construction and manufacturing output will fall again in Q3, possibly sharply, meaning both will be in technical recessions”.

The retail industry also posted gloomy figures in August, with like-for-like sales down 0.5 per cent on last year following the worst June and July on record. Total sales were flat, despite the summer’s BBQ-friendly weather providing a small boost to food purchases, according to the British Retail Consortium-KPMG sales monitor.

“August proved to be yet another incredibly disappointing month for retail,” said Paul Martin, KPMG’s UK head of retail. “With a budgetary spending review, the Brexit crunch point looming and potentially a general election on the cards, it’s clear that the only thing that is certain in the coming months is further uncertainty.”

The British Retail Consortium warned the UK high street was likely to suffer further store closures and job losses and called on the chancellor to “fix the broken business-rates system”, which firms have warned stacks the odds in favour of online shopping companies.

Signs of a wilting economy also raise the stakes for Boris Johnson, who is preparing to face off against MPs seeking to block a no-deal Brexit this week and has indicated he could call a snap election.