Construction Downturn Eases in May Following April’s Slump

UK CONSTRUCTION companies indicated a softer pace of decline in May than the record slump seen in April, reflecting a gradual reopening of construction sites as lockdown measures were eased in England.

The headline seasonally adjusted IHS Markit/CIPS UK Construction Total Activity Index picked up At 28.9 in May, from 8.2 in April, but was the second-lowest since February 2009. Any figure below 50.0 indicates an overall decline in output.

Around 64% of the survey panel reported a drop in construction activity during May, while only 21% signalled an expansion. Where growth was reported, this was mostly attributed to a limited return to work on site following shutdowns in April.

Construction companies recording a drop in activity during May often cited furloughed staff across the supply chain, as well as prolonged business closures in other parts of the economy and disruptions from social distancing measures on existing projects.

Residential most resilient

Residential work was the most resilient category in May (index at 30.9), followed by civil engineering (28.6). Commercial building also fell at a slower pace during the latest survey period, but was the worst performing broad area of construction (26.2).

May data also indicated a rapid drop in new orders received by UK construction companies, which was almost exclusively attributed to the coronavirus disease 2019 (COVID-19) pandemic. Survey respondents commented on a sharp decline in demand for new construction projects, although some noted that the reopening of sites had helped to alleviate the scale of the downturn in order

Mirroring the trend for workloads, latest data indicated that cuts to staffing numbers moderated since April. However, there were again widespread reports that redundancies would have been far more severe without the use of the government’s jobs retention scheme.

Supply Chain disruption

Supply chain disruptions were frequently reported by survey respondents in May, with lead times for construction products and materials continuing to lengthen at a rapid pace. A number of firms commented that a lack of capacity for deliveries and ongoing business closures had resulted in the need to source alternative suppliers, which had also pushed up costs.

Looking ahead, construction companies remain downbeat about their prospects for the next 12 months, with sentiment holding close to April’s low. Recession worries and fears of postponements to new projects were commonly reported in May.

Tim Moore, Economics Director at IHS Markit

Tim Moore, Economics Director at IHS Markit, which compiles the survey, said, “A gradual restart of work on site helped to alleviate the downturn in total UK construction output during May, but the latest survey highlighted that ongoing business closures and disruptions across the supply chain held  back the extent of recovery.

“It seems likely that construction activity will rebound in the near-term, as adaptations to social distancing measures become more widespread and the staggered return to work takes effect. However, latest PMI data pointed to another steep reduction in new orders received by UK construction companies, with the pace of decline exceeding the equivalent measures seen in the manufacturing and service sectors.

“Survey respondents often commented on the cancellation of new projects and cited concerns that clients would scale back spending through the second half of 2020, especially in areas most exposed to a prolonged economic downturn.

“With construction firms anticipating a reduced pipeline of work and fewer tender opportunities, business expectations for the next 12 months remained negative in May. Since the start of the lockdown period in March, business sentiment has remained more downbeat than at any time since October 2008.”

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

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, adds, “The construction sector suffered one of its worst results in May since the PMI surveys began as building work was grounded by the pandemic and lockdown measures.

“Spending was slashed as clients continued to stonewall building firms and put new projects on hold. With furloughed staff across the supply chain, companies saw their capacity leak away and the construction sector now faces the most challenging environment for generations. Building materials were in constrained supply as vendors gradually reopened in May, while items such as personal safety equipment were difficult to source.

“As the sector staggers back to work, and builders put their heads above the parapet, they face a number of obstacles. New safer working practices will ensure operations can continue but client confidence to place new orders is harder to predict. As the furlough scheme is unravelled towards the end of the summer, the floodgates preventing redundancies may also fly open and job losses will follow without a strong pipeline of work waiting in the wings. It will take a long time for the sector to build strength from the ruins of COVID-19.”

Industry Response

Cut VAT and Stamp Duty

Brendan Sharkey, Head of Construction and Real Estate at MHA MacIntyre Hudson.

Brendan Sharkey, Head of Construction and Real Estate at MHA MacIntyre Hudson, says, “We’re starting to see an uplift in activity but more activity does not necessarily mean more profit. Housebuilders in particular will be looking over their shoulders at the unemployment figures. If unemployment starts to rise, we’ll see a corresponding fall in demand for new properties, which would ultimately lead to redundancies at construction sites.

“Businesses are treading carefully and don’t want to spend more than they have – cash is king. It’s positive that firms are watching their cashflow carefully, but of course a lack of investment will also work against any sudden uptick in demand.

“To help smooth the path back to profitability the government should lower VAT and stamp duty to stimulate the housing market, and invest in infrastructure. It should also delay again the imposition of the domestic reverse VAT charge*, currently scheduled to kick in on 1 October 2020.

“The reverse charge is not so onerous that it will itself cause businesses to fail but many companies have failed to adequately prepare for it. As the reverse charge directly impacts cashflow it could bring down otherwise viable but ill-prepared companies. Given it has already been delayed once, in less trying circumstances, logic suggests the government should press pause again.”

Biggest Issue Access to Materials

Kate Kirby, Construction & Infrastructure Partner at legal business, DWF said, ” One of the biggest issues facing the sector, which has largely remained active during the Covid-19 pandemic, is the shortage of access to materials and appropriate subcontractors.

“There is a natural assumption that the sector would see a significant rise in claims and become very contentious, however, it seems generally relations between clients and their construction teams are very good and there is a willingness to act collaboratively to eliminate conflict and preserve commercial relations.