House-building activity slowed in May as its steepest rate since the covid pandemic arrived – excluding covid, you have to go back 14 years to find such a bad month for the sector.
Over the UK Construction Purchasing Managers’ Index (PMI) for May 2023 showed a reading of 51.6, up from 51.1 in April and modestly above the neutral 50.0 mark for the fourth successive month.
The survey suggests that supply conditions continued to normalise in May, with the greatest improvement in vendor lead times since August 2009. This helped to alleviate cost pressures across the construction sector, with the overall rate of input price inflation easing to its weakest for 32 months.
Commercial building (index at 54.2) was the best-performing segment, with client confidence returning and faster decision-making on new projects. Civil engineering also gained momentum (index at 53.9), with growth hitting an 11-month high in May.
However, worries about the impact of higher interest rates and subdued market conditions continued to dampen housing activity. Work on residential building projects decreased for the sixth month running, to give a reading of 42.7.
Despite the travails of the house-builders, the overall rise in construction order books was the strongest recorded since April 2022. This spurred an upturn in staffing numbers for the fourth month in a row but input buying remained broadly unchanged, which partly reflects efforts to reduce excess inventories, the survey authors surmised.
Supply conditions improved considerably in May. Average lead times for the delivery of construction products and materials shortened to the greatest extent since August 2009. This was attributed to fewer logistics bottlenecks, alongside an improved balance between demand and supply.
Finally, construction companies remain optimistic about their growth prospects for the year ahead. Around 45% of the survey panel expect an increase in output levels, while only 14% predict a decline.
Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey said: "May data highlighted a mixed picture across the UK construction sector as solid growth rates in commercial and civil engineering activity contrasted with a steeper downturn in house building. Rising demand among corporate clients and contract awards on infrastructure projects meanwhile underpinned the fastest rise in new orders since April 2022.
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"However, cutbacks to new residential building projects in response to rising interest rates and subdued housing market conditions resulted in the sharpest drop in housing activity for three years. This meant that residential work underperformed the rest of the construction sector by the greatest margin since October 2008. Survey respondents also commented on concerns about the broader UK economic outlook, which contributed to an overall drop in output growth projections to the lowest for four months.
"Inflationary pressures meanwhile eased considerably May, with purchase prices increasing to the smallest extent since September 2020. Supply chain normalisation helped to moderate cost inflation, as signalled by the strongest improvement in delivery times for construction products and materials for almost 14 years."
John Glen, chief economist at the Chartered Institute of Procurement & Supply (CIPS), said: "Though overall output in the construction sector showed an improvement for the fourth month in a row, the steepest drop in house building activity since April 2009, barring the initial pandemic lockdown in early 2020, will send a chill down the spine of the UK economy.
"The residential sub-sector is closely linked to consumer confidence and levels of spending. A further hike in interest rates is expected this month, and along with the relentless increase in the cost of living is making buyers hesitate about purchasing homes. As a result, builder confidence was pinched to remain below the survey average, as business costs remained high and firms expanded their workforce numbers at only a modest pace as they were cautious about their own affordability rates.
"Even with the strongest increase in new orders for just over a year, where commercial and civil engineering projects made up the shortfall, purchasing activity remained flat. Companies were de-stocking their built-up supplies because, with the fastest turnaround in supplier delivery times since August 2009, builders expected that demands for materials would be met should a long-awaited sustainable upturn ever arrive."
Fraser Johns, finance director of regional building contractor Beard said: “We should be cautiously optimistic about the fact that we seem to have avoided the recession and sector-wide decline that many predicted at the beginning of the year. So much so, that there are reasons to be positive about the economic outlook for some areas of construction.
“New work continues to rise at a strong pace. Some material price rises are stabilising, construction products are seeing the shortest lead times in more than a decade and pressures on labour are easing with workforce availability improving and vacancies falling.
“However, these encouraging factors are slightly clouded by inflation being stickier than hoped, which has an impact on our people and the challenges they continue to face.
“In other words, we are by no means out of the woods. Realistic tendering, laser-focused cost control, renewed emphasis on supplier and stakeholder relationships and the ability to continue to adapt to project demands will remain key as the year progresses.”
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