U.K. Construction Contracts at Fastest Pace Since 2009 on Brexit

(Bloomberg) -- U.K. construction unexpectedly contracted at the fastest pace since 2009 in June as the impending vote on Britain's European Union membership stymied residential building.

A Purchasing Managers' Index slid to 46 from 51.2 a month earlier, Markit Economics said in London on Monday. Economists in a Bloomberg News survey had predicted a reading of 50.7, above the 50 level that divides expansion from contraction.

The report adds to evidence that the June 23 referendum was hindering the economy even before the shock vote to leave. Markit said it collected the construction survey data between June 13 and June 29, with just over 80 percent of the responses submitted before the result was announced on June 24.

“Construction firms are at the sharp end of domestic economic uncertainty and jolts to investor sentiment, so trading conditions were always going to be challenging in the run-up to the EU referendum,” said Tim Moore, an economist at Markit. “However, the extent and speed of the downturn in the face of political and economic uncertainty is a clear warning flag for the wider post-Brexit economic outlook.”

Housing was the worst-performing sub index, contracting at the fastest pace since December 2012. Commercial building work also shrank, while civil engineering was stable. The downturn was linked to falling orders and a lack of new work, Markit said.

“A number of firms commented on reluctance among clients to commence new contracts in the run-up to the EU referendum, alongside ongoing uncertainty about the general economic outlook,” Markit said.

Policy Response

Britain's decision to split from the EU has roiled markets, rattled investors and sparked chaos among Britain's political classes. Bank of England Governor Mark Carney said last week that the outlook had deteriorated and policy easing may be needed within months.

The central bank is due to publish its financial-stability report on Tuesday and will hold its next monetary-policy meeting on July 14. With just over a week since the referendum, there is little hard data yet on the economic impact of the outcome.

“The vast majority of June's survey responses were received ahead of the EU referendum, so the worry is that the ensuing political turmoil will hit construction spending decisions for some time to come,” Moore said. “As a result, the latest figures raise the likelihood that the Bank of England will inject additional stimulus this summer in an attempt to dampen the short-term impact of Brexit uncertainty on the real economy.”

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net.

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net.