Commercial Work Propels Construction Growth to 6 Month High in January 2022

UK CONSTRUCTION gained momentum in January 2022 after a subdued end to 2021, with commercial growth helping to offset the weaker rise in house building.

January also saw cost inflation dipping to 10-month low as supply issues eased, with it recording the twelfth consecutive month of growth, according to the latest PMI® data compiled by IHS Markit and CIPS.

There were encouraging signs for the near-term outlook as new orders rose at the fastest pace since August 2021 and input buying was the strongest for six months.

Supplier lead times continued to lengthen in January as staff shortages and a lack of haulage availability hindered deliveries.

However, the peak phase of supply chain difficulties appears to have passed as the latest downturn in vendor performance was the smallest since September 2020.

Construction January 2022

At 56.3 in January, up from 54.3 in December, the headline seasonally adjusted IHS Markit/CIPS UK Construction PMI® Total Activity Index registered above the crucial 50.0 no change mark for the twelfth month in a row. Moreover, the latest reading signalled the strongest rate of output expansion since July 2021.

Commercial work was by far the best-performing category (57.6), with growth accelerating to a six-month high amid a boost to client demand from recovering UK economic conditions. Survey respondents often noted that optimism about the roll back of pandemic restrictions had led to greater spending on commercial construction projects.

Civil engineering returned to growth in January (53.2), although the rebound was softer than seen in other parts of the construction sector. House building activity meanwhile increased at the slowest pace for four months (54.3).

January data illustrated a robust and accelerated rise in new work received by construction companies. The rate of growth was the fastest since August 2021, which survey respondents often attributed to rising confidence among clients.

Strong pipelines of new work encouraged additional staff hiring in January. Latest data pointed to the best month for job creation since last October.

Input buying picked up at the start of 2022, reflecting new project starts and stock building efforts. Despite another rise in demand for construction products and materials, the latest survey pointed to a turnaround in supply pressures. Construction firms recorded the least widespread delays for almost one-and-a-half years.

Rapid rises in raw material prices, energy costs and transportation bills continued push up business expenses in the construction sector. The overall rate of inflation nonetheless eased to its lowest for 10 months in January.

Finally, the latest survey indicated that construction companies remained highly upbeat about the business outlook. More than half of the survey panel (53%) forecast a rise in output during the year ahead, while only 5% predict a decline. Optimism was the strongest since May 2021 and largely reflected increasing tender opportunities and expectations of a swift recovery for the UK economy in 2022.

Tim Moore, Economics Director at IHS Markit

Tim Moore, Director at IHS Markit, which compiles the survey said: “UK construction companies started the year on a strong footing as business activity picked up speed and new orders expanded to the greatest extent since last August.

The composition of growth has become more tilted towards commercial projects as house building lost momentum and civil engineering remained subdued.

“Commercial construction activity benefited from fewer concerns about the Omicron variant and strong business optimism about recovery prospects over the course of 2022.

“Residential work increased at one of the slowest rates since spring 2020, which is an early sign that cost of living concerns and rising interest rates could start to dampen the post-lockdown surge in spending.

“Higher energy, transport and raw material bills led to across the board increases in input prices during January, but fewer supply issues helped ease the overall rate of cost inflation to its lowest since March 2021.”

Duncan Brock, Group Director at the Chartered Institute of Procurement and Supply.

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said: “Builders enjoyed their best month since July, bouncing back from December’s doldrums as opportunities unfurled in terms of new orders, job creation and optimism offering a strong start to 2022.

“Pipelines of commercial work snapped back into action as businesses were more confident in their investment decisions and the sector came out on top with the strongest gap in output growth compared to the residential sector in almost six years. Housebuilders became January’s laggards raising concerns that higher interest rates and consumer inflation could feed into a further slowdown in the coming months as affordability rates are weakened.

“There was some light at the end of the tunnel where supply chains showed signs of improvement and the best delivery times since September 2020. However, the rapid upturn in activity is putting more pressure on suppliers still in recovery while there are shortages in skilled labour and a lack of reliable transportation adding to their woes. 34% of supply chain managers said their materials were taking longer to arrive and as a result purchasing activity escalated in an effort to beat price hikes and shortages.”

INDUSTRY RESPONSE

Mild Weather Boost

Steve Plaskitt, Partner at MHA

Steve Plaskitt, Partner at MHA, says: “The outlook for the UK construction sector remains positive, with plenty of work to go around and strong demand for new projects. The supply chain bottleneck has also eased for certain products (such as steel and timber) and unseasonal mild weather has boosted productivity on construction sites. Crucially the end of Covid-19 restrictions is further bolstering confidence.

“Inflation will continue to be the biggest challenge for the sector. Ongoing shortages of materials and labour, increased energy costs and rising wages in addition to the forthcoming Health and Social Care Levy, will all adversely impact profits. In the housing market rising inflation will also lead to higher house prices.

Red Diesel

“These challenges will be exacerbated by the ban on red diesel for power generation linked to commercial purposes, which will affect generators, cranes and site vehicles from 1 April 2022. This ban is a major source of confusion and concern for the sector. Red diesel, which is just normal diesel dyed red to indicate its tax status, was effectively a rebate on fuel duty for companies using fuel on sites (like construction sites) rather than highways. To help meet climate targets the government is withdrawing this rebate. This means construction firms will end up paying more in fuel duty, which will create a major headache for companies already struggling with rising costs.

Levelling Up

“Given these challenges government spending remains key for the construction industry’s continued growth and the Levelling Up White Paper, published on 2 February 2022, is a strong step in the right direction. The provisions for the creation of new affordable homes and the regeneration of dying high streets and derelict sites in towns are a real blessing for construction firms. This is especially the case for regional construction firms located in cities in the North and Midlands, such as Sheffield and Wolverhampton, which will benefit from the £1.5bn Brownfield Fund delivered by Homes England.”

Optimism for 2022

Mike Hedges Director at Beard

Mike Hedges, director at construction firm Beard said: “After a turbulent 2021, January gave plenty of reasons for optimism in the construction sector.

“Growth picked up with new orders and activity levels both increasing. This is in turn generating job opportunities and the sector should look for diverse candidates to fill these roles.

“After a few months of caution, commercial work led the growth as a positive economic outlook gave clients the confidence to green light new projects.

“While lead times are still longer than usual and cost inflation continues place project budgets under pressure, supply chain issues are easing and the strong pipeline of work is building confidence for construction firms.

“With activity ramping up savvy contractors will need to work closely with supply chains to overcome delays, whilst supporting prompt payment practices. As the economy continues to recover, there is optimism that 2022 could be a sustained year of growth in the industry.”

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