Construction Rebound Continues in November, but Cost Inflation Strongest for 5.5 Years

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Construction Rebound Continues in November, but Cost Inflation Strongest for 5.5 Years
  • Business activity rises at fastest rate since March
  • Commercial work picks up for first time in six months
  • Suppliers continue to pass on higher imported raw material costs

November data indicated that the UK construction sector continued to rebound from the weak patch recorded on average during the third quarter of 2016. Business activity and incoming new work increased at the strongest pace since March, although both rates of expansion remained much softer than the peaks achieved at the start of 2014. Greater workloads underpinned a further solid rise in employment levels and input buying among construction firms. However, average cost burdens rose sharply, with the rate of inflation the steepest since April 2011.

The seasonally adjusted Markit/CIPS UK Construction Purchasing Managers’ Index® (PMI® ) picked up slightly to 52.8 in November, from 52.6 in October, thereby signalling an expansion of total business activity for the third month running. Reports from survey respondents cited improved order books, alongside resilient client confidence and strong demand for residential projects.

There were again reports that heightened economic uncertainty was a key factor weighing on output growth across the construction sector. Housebuilding activity remained the best performing category of construction output during November, despite the pace of expansion slipping to a three-month low.

Construction firms meanwhile reported a marginal rebound in commercial activity, which ended a five-month period of decline. Civil engineering work remained the weakest area of activity.

Increased volumes of construction output were underpinned by a solid upturn in new work during November. The latest rise in incoming new business was the strongest since March and contrasted with a sustained decline in sales through the summer. Some construction firms noted that their workloads had been boosted by a resumption of projects that were delayed after the Brexit vote. However, there were also reports that the stronger inflation backdrop had led to intense competitive pressures and squeezed margins.

UK construction companies reported a steep and accelerated rise in their cost burdens in November, with the rate of inflation the fastest for just over five-and-a-half years. This was overwhelmingly linked to supplier price hikes in response to exchange rate depreciation.

Purchasing activity meanwhile increased at the fastest pace since the start of 2016. Stronger demand for inputs and low stocks among vendors resulted in the sharpest deterioration in supplier performance since June.

Job creation was maintained across the construction sector in November, while the latest survey also highlighted the fastest rise in subcontractor usage so far in 2016. A number of firms linked additional staff recruitment to robust confidence regarding the near-term demand outlook.

That said, business confidence was still softer than seen during the first half of the year, with construction companies generally noting that Brexit-related uncertainty had the potential to weigh on business activity during 2017.

David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply, said: “The sector was on a firmer footing this month, as a slight uptick in overall activity and the strongest level of new business growth since March, resulted in more stability after a summer of uncertainty at the time of the EU vote.

“Purchasing activity grew at its fastest pace since the beginning of the year as stronger workflows and tenders materialising into actual projects prompted increased levels of stock building. This resulted in a sluggish response from suppliers, with the fastest lengthening of delivery times since June, as pressure on capacity and low stocks impacted on demand.

“Once again residential activity led the way, though at softer rates than those seen in October and at a more diminished rate than the survey’s long-range norm. Though this positive growth will provide some relief for the economy, continuing cost pressures will be a worry for the sector in the coming months. The impact of the weaker pound was widely felt in November, with cost inflation the strongest since early-2011. Higher prices were reported for a number of materials including bricks, blocks and slate, as businesses struggled with managing costs. Yet, in spite of this grip on precious margins, headcounts were increased and demand for subcontractors was also sustained.

“Reports of lingering uncertainty around the progress of Brexit negotiations had business optimism divided, where only 45% of respondents expected a rise in activity next year – one of the lowest since the middle of 2013. And, as commentators warn about more inflationary impacts next year, the sector will be concerned that decisions from policymakers must ensure these effects are minimalised so that growth is maintained.”

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