Construction Activity Rises at Fastest Pace in Two Years

GROWTH IN THE UK construction sector gained momentum during May, with activity and new business increasing at sharper rates than in April.

Rising workloads prompted renewed expansions in purchasing activity and employment, while business confidence also strengthened.

Supply-chain conditions continued to improve amid reports of good stock availability at vendors. This contributed to the pace of input cost inflation slowing to a marginal pace.

The headline S&P Global UK Construction Purchasing Managers’ Index™ (PMI) – a seasonally adjusted index tracking changes in total industry activity – posted above the 50.0 no-change mark for the third month running in May to signal a sustained expansion in activity midway through the second quarter of the year.

Moreover, the index rose to 54.7 from 53.0 in April, pointing to a marked increase in activity that was the fastest for two years.

Fastest Rise in Two Years

For the first time since May 2022, all three monitored categories saw activity increase during the month as housing activity returned to growth. The expansion in activity on residential projects was only marginal, however. The sharpest increase in activity was seen in the commercial category where the rate of growth accelerated to a two-year high. Meanwhile, civil engineering activity rose at a solid, but slightly softer pace.

According to respondents, the latest increase in total construction activity reflected sustained growth of new orders. New business rose for the fourth consecutive month, and at a solid pace that was the fastest for a year as demand conditions improved. In particular, firms linked higher new orders to the winning of new contracts and the commencement of previously delayed projects.

With new order growth sustained midway through the second quarter, construction firms increased employment for the first time in five months. Although only modest, the pace of job creation was the sharpest since last September.

Renewed Increase in Purchasing

A renewed increase in purchasing activity was also registered in May, again linked to improving workloads. The rise in input buying ended an eight-month sequence of decline.

Where companies purchased inputs, they once again experienced an improvement in vendor performance amid reports that stock holdings at suppliers were healthy. Furthermore, lead times shortened to the greatest extent in seven months.

With supply-chain conditions improving, companies noted only a marginal increase in input costs during May, with the rate of inflation the softest in the current five-month sequence of rising input prices.

Construction firms also signalled a marked improvement in the availability of sub-contractors in May, despite the largest expansion in their usage since April 2022. The rates charged by sub-contractors increased solidly, albeit at a pace that was weaker than the series average.

Further increases in new orders, in some cases linked to planned marketing campaigns, are set to support continued growth of construction activity over the next 12 months. Companies also hoped for an improvement in economic conditions and reduction in interest rates. Business confidence increased to a three-month high in May.

COMMENT

Andrew Harker, Economics Director at S&P Global

Andrew Harker, Economics Director at S&P Global Market Intelligence, said: “The UK construction sector looks to be building good momentum as we approach the middle of 2024, highlighted by activity increasing at the fastest pace in two years during May. Particularly pleasing was the broad-based nature of the rise in activity as work on housing projects increased for the first time in more than a year-and-a-half.

“Firms are gearing up for further growth in the months ahead, posting renewed expansions in both employment and purchasing activity as workloads increase.

“Moreover, the supply-chain environment continued to improve in May. Companies were able to secure inputs much more quickly than in April and at prices that were only slightly higher than in the previous month on average. These factors should help constructors in their efforts to ramp up operations in line with greater new order inflows.”

INDUSTRY COMMENT

Industry Now on Firmer Footing

Atul Kariya, Head of Construction at MHA

Atul Kariya, Head of Construction & Real Estate at MHA, said: “The rise in construction PMI data is very positive news for the sector. After months in the doldrums, there are definitely green shoots visible, which should continue throughout the summer months.

“The significant increase in the commercial category shows that the industry is now on a firmer footing than it has been for a considerable time, particularly given the slightly more positive economic indicators and the potential for a cut in interest rates later in the summer. Our clients are telling us that things are slowly, steadily and cautiously starting to fall into place after a period of uncertainty, which will enable them to start making longer-term decisions.”

Unlocking the UK’s Housebuilding Potential

Terry Woodley, MD of Development Finance at Shawbrook,

Terry Woodley, MD of Development Finance at Shawbrook said: “A third consecutive rise in construction output should provide developers with further optimism.

“However, market volatility and the possibility of predicted interest rate cuts being pushed back to later in the year mean lenders have had to raise rates in some areas, an additional cost for developers to factor in, alongside the rising costs of materials and labour.

“Many developers will now be turning their attention towards party manifestos ahead of the upcoming election, and will be hoping to see proposals and regulation reforms introduced to streamline planning processes and unlock the UK’s housebuilding potential.

“Developers are also hoping for additional support for first time buyers – with 86% hoping that the next government introduces further measures to assist buyers and ramp up building, according to Shawbrook’s latest research. Until then, developers should consider partnering with a specialist lender to secure the best rates and future-proof their businesses against any further challenges.”

Housebuilding Out of the Deep Freeze

Michael Wynne, Director of housebuilder Q New Homes

Michael Wynne, director of the sustainable housebuilder Q New Homes, commented: “Housebuilding is finally coming out of the deep freeze. While it’s still lagging behind the rest of the construction industry, residential building has inched back into growth territory. But this is still a thaw rather than a rebound. After months of contraction, housebuilding output is only expanding slowly.

“Nevertheless the mood among housebuilders is improving, as the headwinds that held back our industry for so long begin to ease.

“Building cost inflation – which wiped out many smaller players’ profit margins during the dark days of 2023 – continues to soften. And while interest rates remain high, it’s now a question of when, not if, they come down. In time this will make it easier for developers to purchase land and build new homes, and make those homes more affordable for buyers.

“The prospect of a more builder-friendly Government, and a rationalisation of Britain’s dysfunctional planning system, is also putting a spring in the step of many builders – pushing confidence up to a three-month high in May. This is supposed to be summer, but many housebuilders are just glad to be emerging from a long and dark winter.”

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