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UK construction returns to growth

6 Jul 20 Unsurprisingly, given that construction sites have now reopened after lockdown, UK construction industry output was higher in June than May.

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The monthly survey of construction purchasing managers indicated a sharp increase in output volumes. New orders stabilised after three months of steep declines and purchasing activity expanded at the fastest rate since December 2015.

The headline seasonally adjusted IHS Markit/CIPS UK Construction Total Activity Index jumped to 55.3 in June 2020, up from 28.9 in May, to give its highest reading since July 2018.

Residential building was the best-performing area of construction activity in June, since it had also fallen the furthest during the lockdown. Around 46% of survey respondents noted an increase in housing activity. Perhaps surprisingly, however,  more than a quarter (27%) reported than their house-building activity in June was even lower than it had been in May.

After three months of decline, new business volumes increased, but only marginally, suggesting that clients remain hesitant and lead times are lengthening. A number of construction firms noted that new work related to infrastructure projects was a key source of growth in June.

Despite output now improving month on month, it is clearly still down on where it was before the Covid-19 crisis hit and construction companies are now shedding staff.

Severe supply chain disruptions continued in June, reflecting stronger demand for construction inputs and ongoing reports of constrained materials availability (especially plaster). This resulted in another rise in purchasing costs, with the rate of inflation accelerating to its highest since the start of 2020.

The index measuring business expectations for the year ahead remained week by usual standards, but climbed to its highest since February, before the lockdown began. 46% of the survey panel anticipate a rise in business activity, while 31% forecast a reduction. The latter mostly commented on concerns about the wider UK economic outlook.

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Tim Moore, economics director at IHS Markit, which compiles the survey, said: "As the first major part of the UK economy to begin a phased return to work, the strong rebound in construction activity provides hope to other sectors that have suffered through the lockdown period. While it has taken time for the construction supply chain to adapt and rebuild capacity after widespread business closures, there is now clear evidence that a return to growth has been achieved.

"While some survey respondents commented on cautious optimism about their near-term prospects, construction companies continued to face challenges securing new work against an unfavourable economic backdrop and a lost period for tender opportunities. At the same time, operating expenses are rising due to constrained capacity across the supply chain and the impact of social distancing measures.

"Looking ahead, construction firms are more confident than at any time since the start of the COVID-19 pandemic. However, the ongoing reductions in staffing numbers seen in June provide a stark reminder that underlying conditions across the sector are a long way off returning to those seen before the public health emergency."

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said: "Builders were the stars of the UK economy in June with the fastest rise in purchasing activity in almost five years, as pent-up building plans were unleashed following the easing of lockdown measures. Housing led the way with the other main sectors closely behind as several larger infrastructure projects were also on the move.

"As business confidence improved to its largest extent since February, companies were buying up materials and laying the groundwork for a stronger summer’s end. This resulted in the highest input price inflation since the start of the year as supply chains creaked under the strain of increased shortages. Building performance is dependent on other sectors recovering at a similar pace, and as businesses were opening up, some fell short of their usual delivery capacity.

"Only two months ago the construction sector produced the worst results in the history of the PMI, and there are still some potholes to navigate around as government support for jobs is stripped away. Employment levels remained deflated, with reports of redundancies, furloughed staff and a reluctance to boost staff numbers when new order levels remained so flat. But with a significant rise in the headline output number, it looks as though all the building blocks are there for the sector’s increasing health."

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