Construction Output Growth Hits 24-year High in June

UK CONSTRUCTION OUTPUT expanded in June at the fastest pace since 1997 with another sharp rise in new orders.

Suppliers’ delivery times lengthened to the greatest extent since the survey began just over 24 years ago, surpassing the previous record seen in April 2020. Severe shortages of construction products and materials resulted in a survey- record rise in purchasing prices in June.

At 66.3 in June, up from 64.2 in May, the seasonally adjusted IHS Markit/CIPS UK Construction PMI® Total Activity Index signalled the strongest rate of output growth for exactly 24 years. Sharp increases in business activity were seen across all three main areas of the construction sector monitored by the survey.

Housebuilding increased at the fastest pace since November 2003. The second-best performing area was commercial work with output rising at the strongest rate since March 1998. Meanwhile, civil engineering activity rose sharply in June, but the speed of growth eased to a three-month low.

Survey respondents widely commented on demand for new construction work, especially residential building and commercial projects since the reopening of the UK economy. Total new orders have increased in each of the past 13 months, although the latest expansion was slower than May’s survey-record high.

Construction companies indicated another month of sharply rising employment numbers, reflecting efforts to boost capacity and meet incoming new orders. The rate of job creation moderated since May but remained among the fastest seen over the past seven years. Subcontractor use increased at the steepest pace since the survey began in April 1997.

Lead Times

Around 77% of the survey panel reported longer lead times among suppliers in June. The seasonally adjusted index pointed to the worse month for supplier delays since the survey began just over 24 years ago.

Construction companies overwhelmingly cited stock shortages among vendors, reflecting severe delays with shipping and haulage, especially for products sourced from the EU. Panel members commented on short supply of building materials across the board, particularly cement, concrete, plaster, steel, timber and roof tiles.

Price Rises

Imbalanced demand and supply resulted in rapid cost inflation across the construction sector in June. Average prices paid for products and materials increased at survey-record pace. Adding to cost pressures in June was the steepest rise in rates charged by sub-contractors since the survey began.

Construction companies remain optimistic about growth prospects for the next 12 months. That said, the degree of confidence eased to its lowest since January, in part reflecting concerns about labour availability and the sustainability of the recent surge in demand.

Tim Moore, Economics Director at IHS Markit

Tim Moore, Economics Director at IHS Markit, which compiles the survey said, “June data signalled another rapid increase in UK construction output as housing, commercial and civil engineering activity all expanded at a brisk pace. The headline index signalled the fastest rise in business activity across the construction sector for 24 years. Total new orders expanded at one of the strongest rates since the summer of 2007, mostly reflecting robust demand for residential projects and a boost to commercial work from the reopening UK economy.

“Supply chains once again struggled to keep up with demand for construction products and materials, with lead times lengthening to the greatest extent since the survey began in April 1997. Survey respondents widely reported delays due to low stocks of building materials, shortages of transport capacity and long wait times for items sourced from abroad.

“Purchasing prices and sub-contractor charges both increased at a survey-record pace in June, fuelled by supply shortages across the construction sector. Escalating cost pressures and concerns about labour availability appear to have constrained business optimism at some building firms. The degree of positive sentiment towards the year- ahead growth outlook remained high, but eased to its lowest since the start of 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 “A wave of new orders overwhelmed supply chains again this month where stock levels could not keep up with building work accelerating at the fastest rate since June 1997.

“The meagre availability of raw materials placed obstacles in the path of stronger workflows where supplier delivery times extended into record-breaking territory once again and surpassed the height of disruption when the pandemic first hit.

“A lack of delivery drivers and logistics difficulties for EU imports left stock undelivered or unavailable and construction companies waited while costs mounted. Construction’s heavy load remains inflation rising to its highest rate since April 1997 as a staggering 86% of respondents reported paying more for their goods in June.

“These malfunctions in supply chain performance may be a global issue but this doesn’t help UK builders who are ready but unable to return fully to projects which was reflected in the lowest optimism since January. This surge in activity will lose momentum while labour availability along with key materials remain elusive.”

INDUSTRY COMMENT

Threatening Recovery

Brian Berry, Chief Executive of the FMB said: “The building materials shortage is disproportionately affecting small builders and threatening their recovery from the pandemic despite strong growth in the construction sector. The materials shortage is proving a serious detriment to both businesses throughout the supply chain and consumers. As the country reopens for business, it’s imperative that building firms have better access to the materials they need to build.”

“It’s very encouraging that activity in the construction sector is increasing at its fastest rate in over 20 years, but given that confidence is rapidly dropping away, the lack of materials needs addressing before jobs and business continuity start to be compromised. Small firms form over 90% of the construction industry, and they are experiencing the most difficulties as a result of these shortages.”

Use Less Carbon Intensive Alternatives

Matthew Farrow, director of policy for the Association for Consultancy and Engineering (ACE) said: “The figures reflect growing confidence in the UK economy and the construction industry which is, of course, welcome. However, it is clear that the severe shortage of products and materials, as well as issues around transportation, are now having an adverse effect on lead times and putting inflationary pressure on prices.

“There is no easy fix to this problem, other than medium to long-term changes in our approach – I would hope that this leads to smarter design through the use of alternative materials, which could also have the added benefit of creating less carbon intensive buildings and structures and accelerating our path to Net Zero.”

Demand So Hot Its Burning

Gareth Belsham, director of the national property consultancy and surveyors Naismiths, said: “Demand has got so hot, and the supply chain so stretched, that increasing numbers of projects are being burnt by material cost inflation and delays.

“With waves of new orders still flooding in, Britain’s builders are scrambling to keep up – taking on more staff and ramping up their use of sub-contractors.

“But the real pinchpoint is building materials. A double-whammy of post-Brexit trade friction and the pandemic’s legacy means the industry is suffering severe shortages of key materials including cement, concrete, plaster, steel, timber and roof tiles. 

“Input costs – which include materials and labour – are rising at their fastest pace since records began nearly a quarter century ago, and delivery times have never been longer.

“The industry is riding high on a wave of demand and confidence, but there’s a danger that wave could soon break on the rocks of material shortages.

“Materials suppliers are desperately trying to respond by ramping up production, but as the industry accelerates into a full-on boom, the road ahead is likely to be beset with supply-side speed bumps.”

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