Fastest Rise for New Orders Since 1997 as Costs Reach Record High

UK CONSTRUCTION remained on a strong recovery path, with output growth reaching its strongest since 2014, according to the latest IHS Markit/CIPS Construction PMI for May 2021.

New order volumes increased at the fastest pace since the survey began 24 years ago.

Input cost inflation was also at a survey-record high during May, reflecting a surge in demand for construction materials and severe supply shortages.

At 64.2 in May, up from 61.6 in April, the seasonally adjusted IHS Markit/CIPS UK Construction PMI^® Total Activity Index registered above the 50.0 no-change value for the fourth consecutive month and signalled the strongest rate of output growth for just under 7 years.

Housebuilding Leads

House building (index at 66.3) was the best-performing category of construction activity in May, followed by commercial work (64.4). The latest increase in work on commercial projects was the steepest since August 2007, reflecting strong demand conditions following the reopening of customer-facing areas of the UK economy.

Civil engineering activity (index at 61.3) also increased sharply during May, although the pace of expansion eased slightly since the previous month.

The latest survey pointed to a rapid upturn in new business across the construction sector. Around 47% of the survey panel reported higher volumes of new work, while only 11% signalled a reduction. Construction companies attributed the surge in order books to strong demand for residential building work and high levels of confidence about the near- term economic outlook.

Workforce

New project starts and a sustained recovery in construction workloads resulted in another marked rise in staffing numbers during May. The rate of job creation was the fastest since July 2014. Moreover, sub-contractor usage increased at a survey-record pace.

Mirroring the trend for order books, latest data indicated a steep upturn in purchasing activity across the construction sector. Some firms also noted that input buying had been boosted by efforts to build inventories in response to supply shortages.

Materials

Suppliers’ delivery times lengthened sharply in May, with the downturn in vendor performance the second-steepest since the survey began (exceeded only by that seen in April 2020).

Stretched supply chains and steep rises in raw material prices contributed to a rapid increase in average cost burdens. The overall rate of input price inflation was the highest in just over 24 years of data collection.

Construction companies remain highly upbeat about their growth prospects for the next 12 months. Around 61% of the survey panel predict a rise in business activity, while just 8% anticipate a decline. Positive sentiment was mostly attributed to resurgent customer demand, alongside optimism about the UK economic outlook following the successful vaccine roll out.

Tim Moore, Economics Director at IHS Markit

Tim Moore, Economics Director at IHS Markit, said: “UK construction companies reported another month of rapid output growth amid a surge in residential work and the fastest rise in commercial building since August 2007.

“Total new orders increased at the strongest rate since the survey began more than two decades ago, but supply chains once again struggled to keep pace with the rebound in demand.

“There were widespread reports citing shortages of construction materials and wait times from suppliers lengthened considerably in comparison to those seen during April. Imbalanced supply and demand led to survey record increases in both purchasing prices and rates charged by sub-contractors.

“Despite severe challenges with materials availability, construction firms remain highly upbeat about their near term growth prospects. Nearly two-thirds of the survey panel forecast an increase in output during the year ahead, while only one-in-thirteen forecast a decline.”

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 construction sector continued its expansion programme with a phenomenal acceleration in growth and the strongest for seven years as new orders filled in at the fastest rate for almost a quarter of a century.

“Residential work was back in the top spot as house building rose at the quickest pace since August 2014, serving as an antidote to the recent scarcity in housing for lets or buy, and driven by consumer demand and a boost from the stamp duty holiday.

“Busy purchasing managers were under pressure to keep up and buying up at the fastest rate since April 1997, changing sourcing strategies to find depleting essential materials and stocking up just as supply chain problems continued to mount along with prices. With inflation for goods and raw materials at a 24-year high, companies will be concerned that much-needed profits will be eaten away as building projects take shape and could be held up by some of the longest delivery times on record.

“Skills shortages are also becoming a problem, with recruiters finding talented labour hard to find, as job creation was at robust levels and the threat of staffing cutbacks has become a distant memory.”

INDUSTRY COMMENT

Spectre of Bust?

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

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

“Today’s PMI shows that demand in the construction sector remains strong and everyone has plenty of work. However, in truth many developers would prefer a steadier, slower recovery. This heated market is accompanied with the spectre of a coming bust, to end the boom.

“A bust is far from being a foregone conclusion but it is a danger to watch out for. Hopefully the sector will have a softer landing and we will just see the housing market quieten down, possibly by September, rather than crash and burn.

“The other potential problem is inflation and the rising costs of construction materials, such as timber, cement and plasterboard. Some firms might not have priced this into their current contracts and could be caught out. They might think they have taken on lots of work only to find it is not actually profitable, an easy mistake to make in an industry that usually operates on thin margins at the best of times. The bigger firms are liable to weather this much better than smaller contractors, as they usually have better contracts and more influence with suppliers.

“Land scarcity is also a related problem. Getting viable land at the right price for smaller building ventures is becoming more of a problem, and might be another snare for smaller developers. Overall, we’re in strange times and it is exuberant periods of expansion like this that test the industry as much as the downturns.”

White Hot Demand

Gareth Belsham, director of consultancy and surveyors Naismiths, comments:

Gareth Belsham National Head of Building Consultancy, Naismiths

“Demand has gone from hot to white hot.

“With new orders flooding in at the fastest rate on record, Britain’s builders are scrambling to keep up.

“There’s a boom in hiring and the use of sub-contractors is surging at the fastest pace ever seen.

“Barely a year after work ground to a halt on building sites across the UK, builders are now busier than they have been at any time in nearly seven years.

“That acceleration – from 0 to 100 in just a few months – has put huge strains on the supply chain. The availability of building materials just can’t keep up with demand in many parts of the country, and this is causing delays and pushing up prices.

“Input costs – which include materials and labour – are rising at their fastest pace since records began nearly a quarter century ago.

“But these are growing pains, and they are doing little to dent soaring levels of confidence. Nearly two thirds of construction firms expect to get even busier over the next 12 months, as the economy bounces back and construction rides a wave of strong business sentiment.

“With the residential property market seeing average prices spike by over 10% a year, housebuilders are unsurprisingly the busiest of all builders.

“But it’s especially encouraging to see activity on commercial construction projects – which include retail and office developments – now expanding at the fastest rate since in 14 years.

“Across the industry, builders are making up for lost time and buckling up for a full-on boom.”

Same Access to Materials for SMEs

Brian Berry, Chief Executive of the Federation of Master Builders (FMB)

Brian Berry, Chief Executive of the Federation of Master Builders, said: “Rising material prices are continuing to limit the ability of local builders to build back better from the pandemic. It’s incredibly worrying to hear that the overall rate of input price inflation was the highest on record. This is consistent with FMB State of Trade data that shows 93% of builders reported material price increases in Q1 of this year.

“Against the backdrop of high levels of inquiries for building work, it’s imperative that smaller businesses have the same access to materials as the larger firms during these difficult times.”

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