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01 / The state of play

The latest survey of industry conditions suggests there was a further deterioration in May, and that a slowdown in orders and enquiries is already having an impact on output. To make matters worse, materials costs are rising fast and financing problems are affecting a growing number of firms. The overall national construction activity index fell to 40, its lowest level since June 1991. This suggests a high proportion of respondents reported a drop in activity. The overall orders index slipped below 50 for the first time in more than a decade. A value of below 50 indicated that orders books are below average for the time of year.

Across the sectors, residential contractors were hardest hit. The residential activity index fell to 37, its lowest since June 1991 and its orders index dipped below 50 for the first time since September 1996. Although the non-residential sector has generally held up better, its resilience has faltered in recent months. Its output index stood below 50 for the second consecutive month in May, but forward-looking indicators such as orders and enquires remained relatively favourable.

Indicators for civil engineering were slightly improved but still subdued. The civil engineering activity index climbed four points to 49. Orders, however, were reported to be lower than average for the time of year.

Employment is likely to fall in all three sectors, with prospects weakest in the residential sector. The employment prospects index has been falling steadily throughout 2008 and in May it dropped to 38, a level, again, not seen since the early nineties.

02 / Leading construction activity indicator

Experian Business Strategies’ Leading Activity Indicator, a short-term industry forecasting model, predicts that construction activity will continue to decline in the short term. The Indicator, however, is expected to rise steadily throughout the forecast period. In May it bounced back from its nadir in April.

The Leading Activity Indicator uses a base level of 50 – above that level shows an increase, below that level a decrease.

03 / Materials costs

Materials cost inflation is a big concern for respondents. As heightened global demand and constrained supply pushes the oil price ever higher, construction firms, particularly civil engineering ones, have been feeling the pinch.

A staggering 77% of civil engineering respondents reported that annual inflation was running at more than 7.6% in May, significantly higher than the 42% that said it was three months ago. Historically, suppliers in this sector tend to hold fire for a while before passing on increases to their clients. In the current climate, however, it seems inflation is simply too strong for this to be viable. Fifty-one percent of building firms also reported inflation of more than 7.6% over the past year, the highest proportion for quite some time.

04 / Regional perspective

Falls in the regional indicator were across the board in May. Experian Business Strategies’ regional composite indicators, which incorporate activity levels, the state of order books and the number of tender enquiries received by contractors to provide a measure of the relative strength of each regional industry, declined everywhere but East Anglia.

The indicator for Yorkshire and Humberside was particularly weak, falling for a second consecutive month to 39, nine points below April’s level. The North-west (45), the West Midlands (43) and the South-east (49) also recorded a decline in activity. The Northern Ireland index dropped 15 points to 55.

However, across the remaining regions falls were relatively small. The indicator for the North-east fell by four points to 53, Scotland dropped three points to 54, while the East Midlands and South-east both fell by two points, to 58 and 49 respectively. Indicators for the South-west and Wales both fell by one point to 54 and 55 respectively.

East Anglia was particularly strong in May. Its composite indicator climbed by five points to 59, taking it to the top of the leader board.

The UK indicator, comprising responses from firms operating in more than five regions, rose by a marginal one point to 53.