U.K. Construction Unexpectedly Shrinks as Confidence Weakens

(Bloomberg) -- U.K. construction unexpectedly shrank for the first time in more than a year in September as Brexit weighed on investment in commercial building.

IHS Markit's Purchasing Managers' Index fell to 48.1, the lowest since the aftermath of the EU referendum in 2016 and far weaker than economists had forecast. Crucially, it's also below the 50 level that divides expansion from contraction. The pound fell after the report, dropping 0.2 percent to $1.3254 as of 9:45 a.m.

Business optimism fell last month, according to the report, which highlights how Brexit uncertainty is affecting companies' investment decisions. The contraction could also have a bearing on Bank of England officials, who have signaled they're on course to increase interest rates for the first time in a decade -- possibly as soon as next month. 

Markit's survey showed that new business volumes dropped for a third straight month and civil engineering work shrank the most in four years. The decline in commercial development was the second-quickest since February 2013. Meanwhile growth in house building eased to a six-month low. 

Tim Moore, an associate director at IHS Markit cited “fragile client confidence” and said a shortfall of new work has “started to weigh heavily” on construction. 

The report also showed that input-cost inflation jumped to a seven-month high as the price of imported materials rose. 

Markit's manufacturing report, published Monday, showed solid growth at the end of the third quarter, though the index declined more than economists expected. On Wednesday, a gauge of services, the biggest part of the U.K. economy, is forecast to have held at 53.2 in September, the lowest level in a year.

--With assistance from Mark Evans and Harumi Ichikura

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net.

To contact the editor responsible for this story: Fergal O'Brien at fobrien@bloomberg.net.