Construction Growth Slows in August

AUGUST DATA points to a setback for the recovery in UK construction output, with growth easing from the near five-year high seen during July.

It is thought a lack of new work to replace completed contracts has acted as a brake on the speed of expansion.

The headline seasonally adjusted IHS Markit/CIPS UK Construction Total Activity Index registered 54.6 in August, down from 58.1 in July. Any figure above 50.0 indicates growth of total construction output.

Higher levels of activity have been recorded in each of the past three months, but the latest expansion was the weakest over this period. All three broad categories of construction provided a weaker contribution to the headline index in comparison to those seen in July.

House building has registered the strongest rebound since the stoppages of work on site in late-March due to the coronavirus pandemic. This trend continued in August, with the seasonally adjusted Housing Activity Index posting well inside expansion territory (60.7). The equivalent figures for commercial work (52.5) and civil engineering activity (46.6) were notably weaker than the headline index in August.

Modest Expansion

Total new business volumes increased for the third month running during August, but the rate of expansion remained only modest and slowed since July. Construction companies noted that economic uncertainty and a wait-and-see approach among clients had limited their opportunities to secure new work. However, there were again a wide range of comments from survey respondents in relation to the strength of their order books, which largely mirrored the multi-speed recovery experienced across different sectors of the UK economy.

Supply chain disruption persisted across the construction sector, which led to another sharp downturn in vendor performance. Stock shortages and an imbalance of supply and demand for construction inputs contributed to higher purchasing costs. The overall rate of input price inflation was the highest since April 2019.

Infrastructure Boost

Despite reporting subdued new business intakes since the start of the pandemic, construction companies reported an improvement in their business expectations for the year ahead. More than twice as many survey respondents (43%) expect a rise in construction output over the next 12 months as those that anticipate a fall (19%). This was often linked to hopes of a boost from major infrastructure projects and resilient public sector construction spending.

However, an expected rise in business activity could not prevent a further drop in staffing numbers. The rate of job shedding eased only slightly since July and remained among the fastest seen over the past decade.

Ongoing Difficulties

Tim Moore, Economics Director at IHS Markit, which compiles the survey, said: “The latest PMI data signalled a setback for the UK construction sector as the speed of recovery lost momentum for the first time since the reopening phase began in May. House building remained the best-performing area of construction activity, with strong growth helping to offset some of the weakness seen in commercial work and civil engineering activity.

“The main reason for the slowdown in total construction output growth was a reduced degree of catch-up on delayed projects and subsequent shortages of new work to replace completed contracts in August.

“Another month of widespread job shedding highlighted the ongoing difficulties faced by UK construction companies, with order books often depleted due to a slump in demand from sectors of the economy that have experienced the greatest impact from the pandemic.

“More positively for the employment outlook, business expectations climbed to a six-month high in August as construction firms turned their hopes towards a boost from major infrastructure work and reorienting their sales focus on new areas of growth in the coming 12 months.”

Glass Half Full

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

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, adds: “The momentum in the sector’s recovery hit a bump in the road in August with a sudden slowdown in output growth and tender opportunities, while employment trends remained the most fragile in a decade.

“This stalled progress was not a surprise given the warning signs last month that any hard-won progress could start to fizzle out. As new order gains slowed across all sectors, continuing COVID-19 anxiety amongst clients meant many projects still remained on ice. Though residential building remained the strongest, it too was showing signs of strain.

“In addition, there were ongoing difficulties in supply chains which hampered the sourcing of raw materials. Delivery times lengthened in August as a result of stock shortages at suppliers and cost increases were the highest since April 2019.

“Even with all these obstacles, builders were at their most optimistic since the beginning of the year. This glass half full attitude will have to carry companies into the autumn as the UK economy remains delicate and susceptible to more turbulence.”

COMMENTS

Bumpy Ride

David Pratt, Managing Director of Vision Architects, a RIBA-chartered practice, comments: “The construction sector is a curious mishmash right now. Within residential housebuilding, some developers remain active while others are rushing for the door, even selling land to improve cashflow for existing developments.

“With unemployment likely to skyrocket, and major structural changes occurring across both the retail and commercial sectors due to Covid-19, construction is in for a bumpy ride in the short to medium term.

“The entire economy is in such a state of flux that confidence within construction is changing almost by the day.”

A Faltering Foxtrot

Gareth Belsham, Director of the national property consultancy and surveyors Naismiths, commented: “Quick quick slow – the construction sector is dancing a faltering foxtrot as new orders wobble but confidence steps up.

“The trouble is that the caffeine shot of energy that contractors received when sites reopened in May is wearing off. As backed-up projects are completed, there aren’t enough new orders to replace them – and this prompted many building firms to shed staff in August.

“Yet for all that, sentiment is strong. On the day that formal construction work begins on HS2 – Europe’s biggest infrastructure project – it’s striking that the PMI survey found businesses are bullish about the impact this huge programme will have on the industry as a whole. Business expectations soared to a six-month high in August.

“The boom in house prices has given housebuilders their mojo back too – with residential construction easily the strongest of the subsectors tracked by the PMI.

“So far the recovery has been impressively v-shaped, but the industry is now at a critical juncture. If new orders don’t pick up soon, there’s a danger the ‘v’ could turn into a ‘w’.”

Sustaining Confidence

Jessica Levy, Director of Communications of the Federation of Master Builders (FMB), said: “The slowdown in growth reported in today’s Construction PMI report points to the need for policies which sustain much-needed jobs and activity, and give consumers confidence to invest.

“The Green Homes Grants scheme has the potential to do this, but just weeks away from its roll out, the Government needs to step up support for builders to gain recognition for their competence and high quality workmanship and register for the scheme. Rightly, the focus is on competency, but the mechanisms proposed are complex, especially within the Government’s ambitious timescales. The time and costs involved in accreditation risk putting off quality builders who otherwise are committed to doing their bit to achieve Net Zero.”