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Construction purchasers report recovery losing momentum

6 May 22 The latest monthly survey of construction industry purchasing managers suggests that the industry is still growing strongly, but headwinds are starting to be felt.

Major infrastructure schemes like Hinkley Point C continue to boost civil engineering activity
Major infrastructure schemes like Hinkley Point C continue to boost civil engineering activity

Survey respondents noted that higher costs and worries about the economic outlook had started to act as a brake on demand. Optimism about future workloads slipped to its lowest in more than 18 months.

At 58.2 in April, down from 59.1 in March, the headline S&P Global / CIPS UK Construction Purchasing Managers’ Index signalled the weakest rate of output growth since January. The index has nonetheless posted above the crucial 50.0 no-change mark in each month since February 2021.

Of the three main construction segments monitored by the survey, the fastest-growing remained commercial work (index at 60.5), followed by civil engineering (56.2). Residential work remained the worst-performing sub-sector in April and saw the greatest loss of momentum (at 53.8, down from 54.9 in March).

Construction firms cited pent up demand and spending related to Covid-19 recovery plans driving demand for commercial projects, while major infrastructure schemes such as HS2 and Hinkley Point C continue to boost civil engineering activity.

The near-term outlook for construction activity deteriorated in April as total new order volumes expanded at the slowest rate for four months. Escalating raw material prices and, in some cases, hesitancy due to higher borrowing costs and geopolitical uncertainty were reported as headwinds to demand.

A strong pipeline of construction projects and efforts to boost depleted stocks resulted in a steep rise in purchasing activity. Higher levels of input buying have been recorded in each month since June 2020. But suppliers are still struggling to keep up with demand for construction products and materials. Around 45% of the survey panel reported longer lead times, while only 2% had seen any improvement.

Supply chain delays were attributed to shortages of staff, materials and transport, with these difficulties often exacerbated by delays at ports and the war in Ukraine.

Higher prices paid for energy, fuel and raw materials led to a steep increase in average cost burdens during April. Survey respondents also noted that the removal of red diesel subsidies had pushed up costs. The overall rate of purchasing price inflation accelerated to its fastest since September 2021.

Looking ahead, 43% of construction companies are forecasting an upturn in business activity during the next 12 months and only 12% are expecting a fall. However, this gap is narrowing.

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Tim Moore, economics director at S&P Global, which compiles the survey, said: "The construction sector is moving towards a more subdued recovery phase as sharply rising energy and raw material costs hit client budgets. House building saw the greatest loss of momentum in April, with the latest expansion in activity the weakest since September 2021. Commercial and civil engineering work were the most resilient segments, supported by Covid-19 recovery spending and major infrastructure projects respectively.

"Construction companies have built up strong order books since the reopening of the UK economy, which led to another round of rising employment in April and these project starts should keep the sector in expansion mode during the remainder of the second quarter.

"However, tender opportunities were less plentiful in April as rising inflation and higher borrowing costs started to bite. Consequently, longer-term growth projections have slumped from January's peak, with business optimism now the weakest since September 2020."

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: "A slowdown in output growth amongst builders in the UK has highlighted a number of issues to be concerned about including rising costs, shortages and a hesitancy amongst customers.

"New order levels rose at the slowest pace since the end of last year. There were fears around disrupted supplies as 45% of supply chain managers reported longer lead times. To counteract some of these challenges and with an eye on the future, supply chain managers were building stocks resulting in another sharp rise in purchasing activity.

"Inflation hit the highest rate since September 2021, impacted on budgets and made customers think twice about committing. Job creation grew quickly to complete work in hand, risking over-inflating capacity should new order growth slow further. With the Bank of England confirming the interest rate as the highest for 13 years, the squeeze on business lending also led to a relatively gloomy outlook amongst builders for the year ahead, with sentiment the lowest since September 2020."

Mark Robinson, chief executive of public sector procurement agency Scape, said: “After a buoyant first quarter, a slowdown in sector output has felt almost inevitable. Price increases and rising material costs are beginning to factor into future purchasing decisions at a time when public organisations need the confidence to accelerate projects knowing they will be delivered on time and to budget.

“Coupled with interest rates creeping up, firms across the supply chain are likely to see margins further reduced in the coming months without careful project management and engaged clients. Any legislative support mooted in the Queen’s Speech next week, including the energy strategy bill, are unlikely to offer any immediate respite so open dialogue between all parties will continue to be vital for the rest of the year at least.”

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