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News » UK » Construction growth returns but optimism fades » published 2 Nov 2017

Construction growth returns but optimism fades

The latest monthly survey of construction purchasing managers indicates an industry managing to tread water but feeling distinctly uncertain about the horizon in view.

The monthly reading for October 2017 was 50.8 in the seasonally adjusted IHS Markit/CIPS UK Construction Purchasing Managers’ Index (PMI). This puts it only just in growth territory (a score of 50 indicates no change), and an improvement on September’s negative reading of 48.1.

However, output growth was largely confined to house-building; civil engineering and commercial activity were down. Moreover, the balance of construction firms expecting an increase in business activity over the next 12 months sank to its weakest since December 2012.

Employment numbers increased, but at one of the slowest rates seen over the past four years.

Commercial building decreased for the fourth consecutive month in October, which survey respondents attributed to worries about the UK economic outlook and subsequent delays to decision-making among clients.

Civil engineering was the worst performing sub-category, with some firms citing a lack of big-ticket infrastructure projects to replace completed contracts.

A solid increase in residential building work underpinned the slight upturn in overall construction output during October. The latest rise in housing activity was faster than in September, but still subdued in comparison to the average for the year to date.

There was a marginal increase in new work across the construction sector, thereby ending a three-month period of decline. However, the rate of new order growth remained weaker than recorded at any time from mid-2013 to early last year. Survey respondents generally cited fragile client demand, with heightened economic and political uncertainty acting as a brake on growth.

The index measuring construction firms’ expectations for business activity over the year ahead signalled that optimism dipped to a 58-month low in October. Anecdotal evidence widely linked the drop in confidence to concerns about UK economic prospects and a lack of new projects in the pipeline.

As a result, job creation remained subdued in October and input buying increased only marginally.

Intense supply chain pressures were recorded again in October, driven by low stocks and constrained capacity among vendors. Some firms noted that a recovery in demand for construction products across the euro area had added to cost pressures, alongside the weaker sterling exchange rate.

Input prices increased sharply, but the rate of inflation remained softer than the near six-year peak seen at the start of 2017.

Tim Moore, associate director at IHS Markit and author of the IHS Markit/CIPS Construction PMI, said: “Greater house-building was the sole bright spot in an otherwise difficult month for the construction sector. Sustained declines in civil engineering and commercial activity meant that large areas of the building industry have become stuck in a rut.

“Reduced tender opportunities and fragile demand are placing a dark cloud over the near-term outlook. October survey data indicated that UK construction companies are now the least confident about their forthcoming workload ssince December 2012. Staff recruitment has also begun to tail off as construction companies head into the winter with heightened concern about demand conditions.

“The recent soft patch for civil engineering activity has been the most severe for around four-and-a-half years, linked to a shortfall of new contracts to replace completed work on infrastructure projects.

“Commercial building also fell in October, with survey respondents noting that concerns about near-term UK economic prospects had impacted on private investment and led to delayed spending decisions.

“Residential work has been a key growth engine for construction so far in 2017. However, some firms commented on renewed apprehension about the durability of house building outperformance, which has been achieved against a backdrop of sustained policy support and ultra-low interest rates.”

Duncan Brock, director of customer relationships at the Chartered Institute of Procurement & Supply, said: “Though construction orders have shown a small improvement for the first time in four months, the sharp fall in business confidence will send a chill down the spine.

“With the lowest optimism since December 2012, purchasing managers blamed a slowdown in work from commercial clients, vanishing civil engineering projects and an increasing weariness over Brexit for the lack of performance, weak pipelines and slowdown in job hires.

“Supply chains were under the cosh again this month, as buyers struggled to get the materials and products they needed due to low stocks and squeezed supply, exacerbated by increased construction demand in the Eurozone. There were also reports of increasing shortages in some raw materials which slowed work already underway.

“Housing continued to show the strongest foundations and is set to be the main driver of growth in the coming months but the prospect of softer consumer demand and rising costs will impact. Any heavy reliance on residential building alone would be foolhardy with interest rate rises on the horizon and availability of skilled workers lacking in the sector, unless the Chancellor pulls a rabbit out of the hat and supports the training of new construction workers, the pound recovers some stability and a surge of supply capacity become available.”

 

 

 

MPU

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This article was published on 2 Nov 2017 (last updated on 3 Nov 2017).

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