Construction industry slump sparks fears of post-Brexit vote economic slowdown

The UK construction industry continued to decline in June, raising fears that the British economy is on course for sharp slowdown in the wake of the EU referendum result.

The Office for National Statistics (ONS) said construction output dropped by 0.9% in the month of the Brexit vote, compared to a 2.1% fall in May, and marginally lower than economists' expectations of a 1% fall.

However, the construction sector delivered a lower-than-expected drop of 2.2% in June compared to the year before, with economists pencilling in a 2.1% decline.

Output was also down 0.7% for the second quarter compared with the first three months of the year, and was 1.4% lower in contrast to the same period in 2015.

The decline comes as the latest Markit/CIPS construction purchasing managers' index (PMI) showed that the industry had recorded its fastest fall since June 2009 last month, with a reading of 45.9 in July, down slightly from 46 in June but above economists' expectations of 44.

Samuel Tombs, chief UK economist of Pantheon Macroeconomics, said the official data showed that the sector re-entered recession as public sector cuts and Brexit uncertainty took their toll.

"The downturn looks set to deepen in Q3; July's construction PMI broadly is consistent with output falling by about 3.5% quarter-on-quarter," he added.

The ONS said the decline in the three months to June was driven by a 0.8% drop in all new work, while repair and maintenance was also 0.5% lower.

It added that second quarter fall was revised to 0.7% from its initial estimate of 0.4% made at the end of July, but this change did not impact upon its estimate for gross domestic product (GDP) for the period.

GDP grew by 0.6% for the second quarter, up from 0.4% in the first quarter of 2016, thanks to the strongest performance from industrial production since 1999, according to official figures.

Mr Tombs said protracted Brexit negotiations will hamper the construction industry going forward, causing businesses to hold off from committing capital expenditure.

"In addition, the public investment plans won't be reviewed until the Autumn Statement at the end of the year and few construction projects are genuinely 'shovel ready'," he added.

"Accordingly, we continue to think that a slump in construction activity will play a key role in pushing the overall economy into recession over the coming quarters."