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Construction industry about to complete three solid years of growth

4 Apr 16 Latest survey of construction purchasing managers indicates that industry is continuing to chug along adequately, if unspectacularly.

The monthly Markit survey of industry buyers for the Chartered Institute of Procurement& Supply (CIPS) shows the industry heading towards three full years of growth. However, the pace of expansion remained subdued in March, with job creation softening and subcontractor usage dropping for the second month running.

The seasonally adjusted Markit/CIPS UK construction purchasing managers’ index (PMI) posted a score of At 54.2 in March, putting it above the neutral 50.0 value for the 35th successive month. Assuming this month sees growth continue, that will be three straight years of expansion, according to the PMI. However, the latest reading was unchanged since February and indicated the joint-slowest rate of output growth since June 2013.

Sub-sector data highlighted that faster rises in commercial work and civil engineering activity were offset by another slowdown in house-building. The latest increase in housing activity was only marginal and the weakest recorded since January 2013.

Slower growth of incoming new work continued to act as a brake on construction output in March. Reports from survey respondents cited a generally supportive economic backdrop, but some noted that greater uncertainty about the business outlook had resulted in more cautious spending patterns among clients. Reflecting this, latest data signalled the weakest rise in new work received across the construction sector since the pre-election slowdown in April 2015.

March data also indicated greater caution among construction companies in hiring new staff, with the rate of employment growth easing to its slowest since June 2013. At the same time, subcontractor usage decreased at a slightly steeper pace than in February, which contributed to the least marked rise in subcontractor charges for more than two-and-a-half years.

A softer upturn in overall workloads across the construction sector led to another slowdown in input buying growth. Moreover, the latest increase in purchasing activity was the weakest since April 2015.

Suppliers’ delivery times lengthened again in March, but input cost inflation moderated for the second month running to its weakest since February 2010.

Looking ahead, 51% of survey respondents expect a rise in business activity over the next 12 months, while only 11% forecast a reduction. While this signalled that UK construction companies remain optimistic about their prospects for growth, the overall degree of confidence was the joint-lowest since December 2014.

Markit senior economist Tim Moore said: “March’s survey confirms that the UK construction sector is experiencing its weakest growth phase since the summer of 2013. Residential building has seen the greatest loss of momentum through the first quarter of 2016, which is a surprising reversal of fortunes given strong market fundamentals and its clear outperformance over the past three years.

“Construction firms were reliant on a rebound in commercial building and resurgent civil engineering growth to offset the slowdown in housing activity. Civil engineering delivered its strongest performance for just over a year, suggesting that a healthy pipeline of infrastructure projects continues to boost construction output.

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“However, heightened uncertainty about the business outlook appears to have weighed on overall construction demand so far in 2016, with survey respondents citing cautious client spending patterns and a reduced willingness to commit to new projects.

“As a result, volumes of new work disappointed in March as order book growth slipped for the third month in a row and reached its weakest since the pre-election bliplast year.”

CIPS chief executive David Noble said: “There was little comfort to be had this month, as the construction sector was awash with caution and hesitancy not seen since the pre-election lull of 2015. Clients were unwilling to commit to new contracts or expand existing work, meaning that new business growth was at its most fragile since April 2015.

“Where the housing sector was once the star of the show, it became the weakest performer in March. And hopes for more positive employment news were dashed, as the rate of growth in staffing levels slowed to a pace last seen in June 2013; and amidst a landscape of continuing skills shortages after the end of the recession.

“Though activity and new work slowed, construction firms enjoyed the slowest rate of cost increases for just over six years, largely due to ongoing falls in commodity prices. There was evidently a loss of momentum in the sector, though cautious optimism was sustained as a result of encouraging domestic economic conditions, but against a background of some political uncertainty.”

Chris Temple, a consultant at accountancy firm PwC, chipped in with his own take on things. "The UK construction industry enjoyed a relatively strong period of growth from early 2013 through to mid-2015, helped partly by a bounce back in UK-wide housing construction, commercial developments in London and government-led infrastructure programmes,” he said. “However, we’re now seeing increased volatility across some sub-sectors, in particular residential housebuilding, mainly as a result of greater levels of market uncertainty, stalled client spending and delays in project development.

“As well as commodity and currency volatility, the forthcoming EU referendum is weighing on the minds of business leaders. And as we’ve seen in the past, any short term political uncertainty has the potential to impact investment and development pipelines. However, any longer-term outcomes as a result of Brexit – and any resultant uncertainty - would entirely depend on what is negotiated in the event of a decision to leave. In just 12 weeks, we’ll know more about the lie of the land.

"Nevertheless, the fact that PMI has remained flat against these geopolitical headwinds, does demonstrate a strong resilient streak within the UK construction industry and a strong foundation from which to keep building.

"The domestic market will also have received a confidence boost the recent UK budget with major infrastructure investment funding announced to enable further analysis of the trans-Pennine tunnel, HS3 and Crossrail 2. While it will take some time for these projects to get from planning to production, it does provide the industry with a burgeoning market that can be tapped on their doorstep.”

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