April Construction Output Up as Fastest Costs Rise Since 1997

UK COMPANIES signalled a strong rise in construction output during April. There were continued recoveries in civil engineering, commercial work and house building. Workloads were boosted by the fastest rise in overall new orders since September 2014.

On a less positive note, demand and supply imbalances meant that the rate of input cost inflation picked up for the seventh month in a row to its highest since the survey began in April 1997.

April Construction Output Growth

The headline IHS Markit/CIPS UK Construction Index posted 61.6 for April construction output, down only fractionally from March’s six-and-a-half year peak of 61.7. Any figure above 50.0 indicates an overall expansion of construction output. The index has posted in growth territory in 10 of the past 11 months, with January 2021 the exception.

Commercial work (index at 62.2) was the best-performing broad category of construction output in April, although the rate of expansion eased slightly since March. Survey respondents widely commented on a boost to client demand from rising business confidence and the reopening of the UK economy.

Civil engineering (index at 61.5) bucked the softer overall growth trend in April and signalled its fastest speed of recovery since September 2014. Construction companies often cited increased levels of work on major infrastructure programmes, including contract awards from HS2 and Highways England.

Strong House Building

Meanwhile, house building (index at 61.2) continued to rise at a strong pace in April, but the rate of growth eased from March’s recent peak (64.0). There were widespread reports of robust demand for residential building projects and new housing developments.

Total new work increased for the eleventh consecutive month in April. Moreover, the latest improvement in order books was the strongest for just over six-and-a-half years. This contributed to the steepest rate of job creation across the construction sector since December 2015.

Demand, Supply and Delivery

Mirroring the trend for new business, input buying expanded at the fastest pace since September 2014. A rapid rise in demand for construction products and materials continued to stretch supply chains in April.

The latest lengthening of suppliers’ delivery times was the third-greatest since the survey began in 1997, exceeded only by those seen during the lockdown in April and May last year. Construction firms mostly cited demand and supply imbalances, but some suggested that Brexit issues had led to delays with inputs arriving from the EU.

Cost Inflation

Higher prices paid for a wide range of construction items contributed to the fastest overall rate of cost inflation since the survey began in April 1997 (index at 84.6, up from 77.8 in March). Steel, timber and transportation were among the most commonly reported items up in price.

Looking ahead, construction companies remained highly upbeat about their growth prospects in April. More than half of the survey panel (57%) expect a rise in business activity during the next 12 months, while only 7% forecast a decline.

Tim Moore, Economics Director at IHS Markit

Severe Price Pressures

Tim Moore, Economics Director at IHS Markit, which compiles the survey, said: “The UK construction sector is experiencing its strongest growth phase for six-and-a-half years, with the recovery now evenly balanced across the house building, commercial and civil engineering categories.

“New orders surged higher in April as the end of lockdown spurred contract awards on previously delayed commercial development projects. This added to the spike in workloads from robust housing demand and the delivery of major infrastructure programmes such as HS2.

“Shortages of construction materials and much longer wait times for deliveries from suppliers were a sting in the tail for the sector. Aggregates, timber, steel, cement and concrete products were all widely reported as in short supply by survey respondents.

“Supply and demand imbalances for construction items, alongside higher transport costs, resulted in severe price pressures across the board during April. The overall rate of input cost inflation reached its fastest since data collection began 24 years ago, exceeding the previous record seen at the top of the global commodity price cycle in 2008.”

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

Suppliers Struggling

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply adds: “The building blocks were in place in April as builders confirmed more work, more job opportunities and strong optimism for the next 12 months.

“The overall growth rate of new business strengthened to the fastest since September 2014 as all three sectors improved and civil engineering the laggard of last year gained the most momentum.

“Issues around supply chain performance acted as a drag on capacity however as supply constraints on essential materials increased to one of the third highest levels since 1997 when the survey began. Brexit issues remained a factor affecting deliveries from the EU and suppliers generally were struggling to meet the sudden rush in demand leading to shortages of basic materials.

“This inevitably led to the sharpest rise in cost inflation in a generation as builders scrambled to catch up on projects but the biggest rise in job creation since December 2015 also followed, signalling sustainable growth in the sector this summer.”

INDUSTRY COMMENTS

F1 Acceleration

Gareth Belsham National Head of Building Consultancy, Naismiths

Gareth Belsham, director of the national property consultancy and surveyors Naismiths, comments:“The gas pedal is still stuck firmly to the floor. But the construction industry’s Lewis Hamilton-style acceleration now has an unwanted passenger – inflation.

“Input costs – which include materials and labour – are rising at their fastest pace since records began two and a half decades ago.

“Suppliers of key materials like steel and timber are struggling to keep up with surging demand and this is driving prices ever skyward.

“But this is a mere fly in the ointment. After a rollercoaster ride during 2020, the construction industry is back squarely in boom territory. With the Bank of England predicting that in 2021 the UK economy will expand at its fastest rate since the Second World War, builders are happily bobbing on the crest of a wave of business confidence.

“It says much that housebuilders – typically the most recession-defying sector of the construction industry – have been overtaken by firms specialising in commercial and infrastructure projects.

“Growth is refreshingly broad-based and sentiment is soaring. Well over half of the firms surveyed for this PMI data predict that demand will pick up even further over the next 12 months. Building is back with a bang.”

Covid Hangover

Joe Sullivan, partner at MHA, says:“The success of the UK’s vaccination programme and indications from senior politicians that the country is on track to reopen its economy lie behind today’s broadly positive figures. The March 2021 budget also gave the sector a strong set of tools with which to dig itself out of the pandemic slump and these are clearly paying off.

“At the moment residential house builders cannot construct plots quickly enough and the extended Stamp Duty holiday is fuelling liquidity within the market. In late March and early April Local Authorities also pushed through a lot of new building projects, to coincide with the start of the tax year, providing a short-term boost to the industry.

“However, while demand is healthy, on the supply side there are issues. Many businesses are reporting longer lead times for sourcing crucial materials and there is also some inflationary pressure on material prices. To some degree these are a lingering effect of Brexit, but they are also a hang-over from limited productive capacity and high demand experienced in 2020 due to the Covid-19 crisis.

“To address these issues businesses need to ensure risk is appropriately handled within relevant contracts and that they are maintaining close communications with a large body of suppliers to counter any potential shortages on the horizon.”

>> Read about the previous IHS/CIPS construction figures in the news