Latest survey of construction purchasing managers reveals optimism diminishing and the rate of industry growth moderating.
Although the industry is still growing, according to this survey series, some commentators fear that this is about to change.
“The tide has turned. While the construction sector is still expanding, momentum is draining away.,” said Gareth Belsham, director of surveyors Naismiths.
The latest rise in house-building activity was the weakest since the post-covid recovery began two years ago. Survey respondents suggested that subdued consumer confidence and worries about the economic outlook had constrained demand. Higher borrowing costs and intense inflationary pressures were also cited as factors likely to hold back growth over the next 12 months.
The latest survey data indicated that business activity expectations at construction companies were the least upbeat since August 2020.
The headline S&P Global / CIPS UK Construction Purchasing Managers’ Index (PMI) – which measures month-on-month changes in total industry activity – registered 56.4 in May, down from 58.2 in April and 59.1 in March. May’s was the lowest reading for four months.
The house building sub-sector scored 50.7 from 53.8 in April – barely growing at all, since a score of 50.0 represent no change on the previous month. It was the worst score for residential work since May 2020.
Commercial building was the fastest-growing segment in May, scoring 59.8, down from 60.5 in April. Construction companies reported strong demand for commercial work, despite some hesitancy due to the uncertain economic outlook.
Meanwhile, civil engineering activity increased for the fifth month running. May’s reading for this sector was 55.5, down slightly from May’s 56.2, thanks to major infrastructure projects chugging along.
Total new orders were up again in May, which marked two years of continuous sales growth in the construction sector. That said, the latest increase in new work was the slowest since December 2021.
There were again widespread reports of recruitment difficulties but job creation accelerated slightly in May and was the strongest for four months. Survey respondents typically cited efforts to boost capacity and meet rising customer demand.
Demand for construction products and materials also remains strong, with a steep and accelerated rise in total purchasing volumes. Efforts to replenish stocks before prices rise further also contributed to higher purchasing activity in May, according to respondents. Some firms noted an improvement in the availability of construction items, despite ongoing challenges including logistics bottlenecks, Brexit trade frictions and supplier staff shortages. Delivery delays were the least widespread since February 2020.
The number of construction firms predicting an increase in business activity during the year ahead (46%) continues to clearly exceed those expecting a decline (19%). However, the resulting index measuring overall growth expectations across the construction sector signalled the weakest degree of optimism since August 2020.
Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey, said: "May data signalled a solid overall rise in UK construction output as resilience across the commercial and civil engineering segments helped to offset weakness in house building. Residential construction activity was close to stagnation in May, which represented its worst performance for two years amid signs of softer demand and a headwind from low consumer confidence.
"New order volumes expanded at the slowest pace since the end of 2021, which added to signs that heightened economic uncertainty has started to impact client spending. Concerns about the business outlook were signalled by a fall in construction sector growth projections to the lowest for more than one-and-a-half years in May. Around 19% of construction firms predict an outright decline in business activity during the year ahead, up from just 5% at the start of 2022.
"On a more positive note, supplier delays subsided in May, with the latest downturn in performance the least marked since February 2020. Meanwhile, rapid price pressures persisted due to rising energy, fuel and staff costs, but the overall rate of inflation eased to a three-month low in May."
Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: "Though still offering a comfortable margin above the no change mark, the construction sector saw growth ease to a four-month low with the usual suspects taking the heat out of the recovery – elevated inflation, future uncertainty and supply-chain disruption.
"Supply chain managers scaled up purchasing levels to beat expected price increases in the months ahead as inflation rates remained powerfully strong even with the slight easing in prices. There was also robust job hiring in May so businesses could secure the best talent from a dwindling pool of skilled candidates to build capacity for the remainder of the year.
"Subdued client confidence affected new order levels with the slowest rise in pipelines of new work since December 2021. The housing sector in particular showed further signs of fragility with the worst performance since May 2020 and moving closer to the danger zone of negative territory. Affordability concerns will be weighing on the mind of potential house buyers grappling with escalating costs for everyday items, resulting in a postponement of big purchases until the UK economy shows more resilience.
"The lack of positive sentiment was also reflected in construction companies’ confidence over the next 12 months, with optimism dropping to the weakest since August 2020 even though this was the best performing sector out of the three."
Gareth Belsham, director of surveyor property consultant Naismiths, said: “The slowdown is sharpest in residential construction, where output has dipped alarmingly close to stagnation territory. Housebuilders are more directly exposed to consumer confidence than any other construction sector; and on this evidence, some resi developers are taking their foot off the gas in response to the slowing economy and rising cost of mortgages.
“These concerns have combined to make builders more downbeat about the future than they have been at any time since the lockdown-afflicted summer of 2020.
“Nevertheless no-one is breaking out the ‘end is nigh’ sandwich boards yet, and there’s still plenty to cheer in this PMI data. Activity remains buoyant in the commercial construction and infrastructure sectors, and new orders continue to increase across the board, capping off two years of uninterrupted sales growth.
“Building contractors continue to hire staff, and while the prices of raw materials are still rising painfully fast, availability is improving and project delays are easing.
“Looking ahead, the improved supply of building materials should take some of the sting out of inflation, but with fuel prices marching upwards again, transport costs will continue to eat into everyone’s bottom line. The industry is digging in for a tough second half of the year.”
Aecom head of cost management Brian Smith said: “The concerning aspect of the PMI was the fall in housing sector workload, which is one of the main drivers of activity and growth for the construction sector in the UK. Should this sector begin to misfire as a contributor to aggregate construction sector workload, the effects of this will be felt across the industry because of its size and demand for resources.”
Federation of Master Builders chief executive Brian Berry said: “With output and optimism hitting lows we last saw at the start of the pandemic, it’s a worrying time for small building firms. Hardworking local builders have been beset by challenges and at a time when they rightly hoped for recovery, things look set to get worse, with inflation on the rise alongside a likely decline in consumer demand for building services as the cost of living crisis bites. If the market continues to stagnate, many of these local building firms will face difficulty remaining solvent.”
However, not everyone was gloomy about the he survey findings. Beard finance director Fraser Johns said: “We always knew that the road to sector recovery was not going to be a straightforward one and we will continue to refine and adapt our business practices to deal with the obstacles in our path. These obstacles are certainly not insurmountable, and the pent up demand from the previous year is evident in our healthy order book. However, the inflationary challenges are considerable with continued rises in the price of materials like steel, concrete, timber and glass. Nevertheless, that challenge can be met by openness in our the tendering process and by being fair to suppliers and subcontractors, engaging with them early in the tender process and paying them promptly.”
Brendan Sharkey, head of construction and real estate with the MHA accountancy network, said: “The UK construction sector, particularly the residential housing market, is coping relatively well despite the ongoing cost of living crisis. Momentum may have slowed but given the circumstances, the sector is holding up well. The economy may be tough for many but the pandemic was actually good for household savings, allowing people on relatively modest incomes to build up a war chest which they can now put towards a deposit. In addition, supply chain issues are no longer causing acute problems. Contractors and developers are usually able to get their hands on construction materials. Construction is a low margin business and some contractors will be running at a loss at the moment but the more financially stable companies are well placed to survive even if market conditions deteriorate.
“The sector isn’t crying out for government help but one issue the government needs to start considering more seriously is raising awareness of energy performance regulations among the public. Legally an EPC (energy performance certificate) is a requirement before selling a property. In 10-15 years’ time homes that don’t meet stringent energy performance standards will be unsellable. Some buyers definitely know this and this is one reason why demand for new build properties is strong (as they are EPC compliant) but the government hasn’t explained to the average buyer how risky the purchase of a second hand home that falls short of energy efficiency standards will become. There is a sense ministers don’t want to rock the apple cart but it is crucial more buyers take a long-term view and invest in energy efficient properties or recognise what they are buying will need a retrofit during their ownership.”