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Construction growth remains subdued

4 Jun 18 The UK construction industry is entering summer in a distinctly fragile condition, according to indications contained within the latest survey of purchasing managers.

The May 2018 construction purchasing managers’ index (PMI) data signalled only a modest improvement in UK construction activity. Commercial activity growth sped to a three-month high but there was softer expansion in both residential and civil engineering. Significantly, new order books contracted for the fourth time in the past five months amid general uncertainty in the sector.

This take on new orders contradicts data gathered by the Builders Conference, which has found construction industry new orders running steadily at consistently above £4bn for every month of the year so far. [See report here.]

At 52.5 in May, the seasonally adjusted IHS Markit/CIPS UK construction PMI was the same as that recorded in April, indicating only modest increase in total activity.

Some firms suggested that unusually good weather conditions had boosted activity as they were able to catch up after weather-related disruptions earlier in the year.

Residential work remained the strongest of the three monitored sub-sectors for the third month running during May, although the pace of expansion eased from April’s 11-month high, which had seen house-building activity rebound from heavy snow in March.

Both the commercial and civil engineering sectors remained in growth territory for the second month running in May, with the former being the only category to record a faster rate of expansion than in April.

But the PMI survey found that new order books slipped back into decline during May. Panel respondents blamed political and economic uncertainty, subdued retail sector conditions and fragile business confidence as key causes of weaker demand for construction projects.

Optimism towards future growth prospects slumped to a seven-month low.

The drop in confidence was linked to fears of political and economic uncertainty and an expected slowdown in the construction sector. Alongside easing positive sentiment, job creation softened to a four-month low in the latest survey period. Surveyed companies continued to report a shortage of skilled staff availability.

Purchasing costs rose sharply. The rate of input price inflation in May was the steepest registered since February. Panel members commonly reported fuel hikes, alongside higher plastic and steel-related input prices.

Supplier delivery times continued to get worse in the latest survey, though the degree of deterioration was one of the weakest over the past 18 months. Where longer times were reported, businesses frequently blamed shortages of materials at vendors.

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Sam Teague, economist at IHS Markit and author of the IHS Markit/CIPS Construction PMI, said: “The May PMI data signalled an unchanged pace of activity growth across the UK’s construction sector since April’s somewhat underwhelming rebound, yet nevertheless indicating a recovery in the second quarter after the contraction seen at the start of the year.

“However, activity in May was once again buoyed by some firms still catching up from disruptions caused by the unusually poor weather conditions in March, and a renewed drop in new work hinted that the recovery could prove short-lived.

“Inflows of new business slipped back into decline, signalling the resumption of the downward trend in demand seen during the opening quarter.

Companies frequently noted that Brexit uncertainty and fragile business confidence led clients to delay building decisions in May.

“With new order books deteriorating and cost pressures picking back up, it’s not surprising to see construction firms taking a dimmer view of prospects and pulling-back on hiring, all of which makes for a shaky-looking outlook.”

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: “The two millstones of uncertainty and weak economic growth gave the sector plenty to worry about this month, and whilst activity still grew, the lowest business confidence in seven months suggests the subdued pipeline of new work is having an effect. With a decline in new orders for a fourth time in five months, it was client hesitation and consumer diffidence towards spending that had construction activity stuttering.

“Higher prices for fuel, raw material shortages, higher labour costs combined with slow delivery times were further obstacles to growth as firms nervously assessed their workforce for much-needed talent and subcontractors could name their price.

“However, it’s encouraging to see the housing sector put in a strong performance for a second month running, after stumbling at the beginning of the year, and with only small improvements in the other sectors, residential building is keeping construction’s head above water.

“It’s likely that the construction sector’s performance will be a slow and steady crawl through the second quarter, as the spectre of Brexit continues to dominate, and the double pincer movement of few orders, and higher costs, could see the sector stutter further.”

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