Construction sector growth slows dramatically to weakest expansion since last August according to PMI survey

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Activity in the construction industry slowed (Source: Getty)

The pace of expansion in the construction industry slowed significantly in July, according to a closely followed indicator, as a fall in commercial property output dragged on the sector.

The construction sector purchasing managers’ index (PMI) slumped from a reading of 54.8 in June to only 51.9, according to IHS Markit.

While the reading remains above 50, indicating the sector still grew during the month, the sharp fall came well below economists’ consensus expectations for the sector to hold up. Consensus predictions had seen a long-run average reading of 54.5.

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The weakness was driven by the fastest fall in volumes of commercial building activity for a year allied with a "softer" housing expansion, IHS Markit said.

Builders were also squeezed by one of the sharpest rises in costs since 2011.

Construction has enjoyed a resurgence in the past year after the sector shrank following the EU referendum last June.

Activity in the industry slumped to its lowest since 2009 in the aftermath of the Brexit vote, as fears over the future of British property grew.

Since then house prices have continued to rise, despite weakening mortgage approvals suggesting demand may be slipping, weighing on the outlook for the medium term in the construction sector.

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Political and economic uncertainty dragged on demand for new projects, according to Tim Moore, associate director at IHS Markit, who carried out the survey.

He said: “Worries about the economic outlook and heightened political uncertainty were key factors contributing to subdued demand. Construction firms reported that clients were more reluctant to spend and had opted to take longer in committing to new projects."

Firms holding back on investment decisions could point to further weakness ahead for the sector. The Bank of England judges that commercial property prices, particularly in London's West End, could be exposed to a sharp fall. Commercial property throughout Britain is at the top end of the Bank's calculation of sustainable valuations, while for London's West End valuations are far outside it.

Paul Trigg, a construction specialist at insurer Euler Hermes, said: “We expect to see growth momentum in the construction sector soften as businesses feel the effects of falling investment levels, a contracting talent pool and the persistence of troublesome, low-margin work."

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