August 2, 2016 / 8:33 AM / a year ago

UK construction shrinks at fastest pace in seven years after Brexit vote - PMI

LONDON (Reuters) - Britain's construction industry suffered its sharpest downturn in seven years last month, according to a business survey on Tuesday, the latest to suggest the economy is at risk of recession after June's Brexit vote.

The Markit/CIPS UK Construction Purchasing Managers' Index (PMI) inched down to 45.9 in July from 46.0 in June -- the lowest reading since June 2009 and some way below the 50 mark that divides growth from contraction.

While better than all forecasts in a Reuters poll of economists that pointed to a reading of 43.8, the PMI -- collated entirely after the June 23 referendum -- showed commercial construction dwindled and confidence flagged.

There was a similarly downbeat report from manufacturers on Monday, contributing to growing evidence that business and consumer confidence took a hefty knock after Britons voted to leave the European Union.

Overall there was little in the construction PMI to challenge expectations that the Bank of England will cut interest rates on Thursday to a new record low and possibly revive its bond buying programme.

"Some sort of action (from the BoE) seems to be entirely warranted," former Bank of England deputy governor Charlie Bean told Fathom Consulting's quarterly economic outlook event at Thomson Reuters on Tuesday.

"The (PMIs are) quite important, actually one of the first bits of hard information that things have started to turn down as opposed to more general optimism-type measures," added Bean, who served as a rate-setter from 2000 to 2014.

Sterling and British government bonds showed little reaction to the PMI.

Construction firms frequently cited ongoing economic uncertainty hurting their order books, survey compiler Markit said.

The PMI for the far larger services sector, due on Wednesday, will offer a much clearer steer on how Britain's economy has fared since the Brexit vote.

Workers stand on scaffolding on a new residential building at Battersea in London, Britain, March 7, 2016.Toby Melville/File Photo

Clients of construction companies had adopted a 'wait-and-see' approach to projects, rather than cancelling them outright or reducing their scope, the survey showed.

COMPANY VIEWS MIXED

The firmly downbeat mood of the PMI contrasts with mixed reports from some major British construction companies, with Kier Group plc (KIE.L) and housebuilder Taylor Wimpey (TW.L) reporting little impact so far.

But on Tuesday, builders' merchant Travis Perkins said the Brexit vote had created "considerable uncertainty" in the industry and last month Barratt Developments - Britain's biggest housebuilder - said it might slow the pace of construction in response to the Brexit vote.

The survey of 170 construction companies showed firms cut staffing at the fastest rate since November 2012, with this component of the index falling to 49.3 from 52.5 in June.

Commercial work, which accounts for almost a third of total new construction work, contracted at the fastest rate since December 2009.

Last month the Bank of England said it expected "sizeable falls" in commercial real estate prices in the near term and a number of funds investing in the sector temporarily stopped investors withdrawing funds.

Housebuilding declined for a second month, albeit at a slightly slower pace than in June.

Prices paid for raw goods and materials for both construction and manufacturing increased at the sharpest pace since March 2015, which Markit linked to sterling's depreciation since the referendum.

The pound has recovered some ground since a dramatic 14 percent fall against the dollar after the vote, but hit a three-week low against the euro after the disappointing manufacturing PMI on Monday.

Additional reporting by Ana Nicolaci Da Costa; Editing by Catherine Evans

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