Construction stays optimistic despite growth continuing to soften

Construction activity and new orders continue to grow, but at a slowing pace – and with prices rising steeply.

As previously reported, the price of building materials has gone up by more than 20% in the past year overall, according to official statistics.

And now the latest survey of construction industry purchasers indicates that growth is softening across house-building, commercial work and civil engineering activity. On the plus side, optimism remains firm.

The seasonally adjusted IHS Markit/CIPS UK Construction PMI Total Activity Index posted a score of 55.2 in August 2021. The index is still comfortably above the 50.0 mark and so is firmly in growth mode, but it is heading in the wrong direction, down from 58.7 in July and 66.3 in June. The restricted supply of materials and transport is being blamed.

Commercial work (index at 56.0) was the best performing broad category of construction output in August, though the rate of expansion eased to the slowest for six months. This was followed closely by house-building (55.0), while civil engineering remained the slowest growing subsector (54.8) for the fourth month in a row.

Total new work increased for the 15th consecutive month in August. While the latest improvement in order books was marked overall, the rate of growth softened to the weakest since March. Businesses noted a continued resumption of projects that had been delayed due to Brexit and the Covid-19 pandemic, though client confidence was dampened by volatility in raw material supplies and increased costs.

Input cost inflation accelerated to the second-fastest rate in the 24-year history of the survey, surpassed only by June’s record rise.

Looking ahead, construction companies remained upbeat about their growth prospects over the coming 12 months, however. Positive sentiment was underpinned by hopes of an expected rise in new contract awards across all subsectors of construction.

Usamah Bhatti, an economist at IHS Markit, which compiles the survey, said: "Evidence that the UK construction sector began to feel the impact of ongoing supply chain disruption was widespread midway through the third quarter of 2021. Growth rates for overall activity as well as the three monitored subsectors eased further from the recent highs earlier in the summer. Similarly, new business inflows have continued to increase at a marked pace, yet even here the rate of growth has eased to a five-month low.

"Supply chain disruption continued to disrupt activity across the UK construction sector, as demand for materials and logistics capacity outstripped supply. Average vendor performance continued to deteriorate at a near-survey record rate, as firms noted severe shortages of building materials, a lack of available transport capacity and long wait times for items from abroad due to port congestion.

"As a result, the rate of input cost inflation faced by construction companies accelerated to the second-fastest on record, while the increase in subcontractor rates hit a fresh series high, fuelled by supply shortfalls in the sector. Despite this, businesses noted a stronger degree of optimism regarding the year-ahead outlook, as more than half of survey respondents predicted a rise in activity. This was underpinned by expectations that new contracts would be brought to tender across the construction sector as markets continued to recover from the economic disruption caused by the pandemic."

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: "Formidable supply chain pressures restrained purchasing activity and building projects across the board in August as 68% of construction companies reported even longer delivery times for materials compared to July. A combination of ongoing covid restrictions, Brexit delays and shipping hold-ups were responsible as builders were unable to complete some of the pipelines of work knocking on their door.

"Material and staff costs went through the roof as job hiring accelerated to fill the gaps in capacity left behind by employee moves, overseas worker availability and brought on by skills shortages. Paying higher wages for experienced staff along with low stocks of materials at suppliers meant inflationary pressure rose at a rate almost on a par with June’s survey record. 84% of supply chain managers reported paying more for their purchases.

"These obstacles to construction’s progress are set to continue and are now affecting last year’s strongest performer – house-building, which will exacerbate the problem of housing supply. However optimism improved on last month as more than half of building firms believe that output will continue to rise in the year ahead."

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