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Supply chains under pressure as growth softens

2 Feb 17 The January 2017 survey of construction purchasers indicates a sluggish start to the new year, with industry growth slowing a little.

January data revealed business activity and incoming new work both expanding at weaker rates than at the end of 2016. Despite this, survey respondents expressed confidence regarding the year-ahead and payroll numbers rose at their fastest for more than six months.

Another key feature was the weakened pound resulting in the strongest rate of input cost inflation since August 2008.

The seasonally adjusted Markit/CIPS UK Construction Purchasing Managers’ Index (PMI) registered 52.2 in January, down from 54.2 in December. This is the lowest reading since the post-referendum recovery began in September 2016. All three sub-sectors (housing, commercial and civil engineering) recorded softer rates of output growth in January. Although housebuilding remained the best performing category, the latest expansion was the weakest for five months.

Slower growth of business activity largely reflected a moderation in new order gains at the start of 2017.  The latest rise in new work was the least marked since October 2016. While some construction firms commented on a boost to sales from improving domestic economic conditions, there were also reports citing subdued willingness to spend among clients in January.

More than half of the survey panel (51%) forecast a rise in business activity over the next 12 months, while only 7% anticipate a reduction. The index measuring construction firms’ year-ahead expectations has now picked up in five of the past six months.

Average cost burdens increased at the steepest pace for almost eight-and-a-half years in January.  This was widely linked to rising prices for imported materials at the start of 2017.

Tim Moore, senior economist at IHS Markit, said: “UK construction firms experienced a subdued start to 2017, with all the key categories of activity losing momentum. While housebuilding retained its position as the fastest growing part of the construction sector, the latest upturn was the weakest since the post-referendum rebound emerged in September 2016.

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“New business volumes also expanded at a softer pace in January, but there were more positive trends in terms of staff hiring and business optimism regarding the year-ahead outlook. The latest survey revealed an accelerated rise in payroll numbers at construction companies, as well as the fastest upturn in subcontractor usage since the end of 2015. A number of survey respondents commented on a boost to their workloads from the resilient economic backdrop, alongside a strong pipeline of new project starts in 2017.

“Meanwhile, the weak pound continued to have an inflationary impact on the UK construction sector in January. Purchasing costs increased at the strongest rate for almost eight-and-a-half years, as suppliers sought to pass on higher prices for commodities and imported construction materials.”

David Noble, chief executive at the Chartered Institute of Procurement & Supply, said: “Despite the biggest rise in input costs since August 2008, the sector was in buoyant mood at the start of the year, with highest level of confidence since December 2015.

“Continuing cost pressures from the weak pound and escalating commodity prices failed to impact significantly on purchasing volumes, as input buying increased following last month’s slight fall while job creation rose to an eight-month high. Previously stalled projects and plans were given the go-ahead as the sector ensured sufficient staff resource was in place to meet future demand.

“However, the dark cloud on the horizon was the continuing pressures on supply chains. Material shortages, lengthening delivery times and supplier performance, the weakest since June 2015, could become a roadblock to the sector’s continuing growth.

“In the short term at least, the outlook is positive, as long as economic conditions remain supportive and firms are able to control their rising costs.”

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