March 2022 Construction Data Shows Continued Rise in New Work

MARCH 2022 DATA pointed to a continued rise in UK construction output, helped by the fastest increase in new work for seven months.

However, escalating inflationary pressures and concerns about the economic impact of the war in Ukraine contributed to a sharp drop in business optimism.

The degree of confidence about the growth outlook was the weakest since October 2020. The headline S&P Global / CIPS UK Construction Purchasing Managers’ Index^® – which measures month-on-month changes in total industry activity – registered 59.1 in March, unchanged from February and well above the 50.0 mark that separates expansion from contraction. The latest reading signalled the joint-fastest rate of output growth since June 2021.

Commercial work was the best-performing segment in March (index at 60.8), with projects restarting amid the roll back of pandemic restrictions. This part of the construction sector has seen output growth accelerate for three months in a row and the latest upturn was the strongest since June 2021.

In contrast, the recoveries in civil engineering (index at 56.3) and residential work (54.9) lost momentum in March. It saw the slowest expansion of the three broad categories monitored by the survey.

Rise in New Work

Amid the rise in new work, total new orders expanded at a robust and accelerated pace in March, with the latest rise the strongest since August 2021. Construction companies typically cited improving tender opportunities and resilient customer demand, despite some reports that economic uncertainty and rising costs had limited new business growth.

Rising workloads contributed to a considerable rise in staffing numbers during March. That said, the pace of job creation eased to its weakest so far this year amid ongoing difficulties filling vacancies.

Mirroring the trend for rising new orders, latest data signalled a sharper increase in purchasing activity across the construction sector. Input buying rose at the steepest pace since July 2021, driven by a combination of stronger demand and efforts to build stocks where possible.

Capacity constraints, a lack of haulage availability and ongoing logistics difficulties led to another sharp downturn in supplier performance. Set against the rise in new work, around 33% of the survey panel reported longer lead times for construction products and materials, while only 1% saw an improvement. However, delays remained less widespread than the peak seen last summer.

Imbalanced supply and demand, alongside escalating energy, fuel and commodity prices, resulted in a rapid rise in average cost burdens in March. The overall rate of input price inflation accelerated sharply since February and was the highest for six months.

Concerns about the war in Ukraine, forecasts of severe cost inflation and a less favourable global economic outlook all weighed on constructors’ confidence in March. Around 48% of the survey panel expect a rise in business activity during the year ahead, while only 15% predict a decline. However, the balance of positive sentiment was the weakest seen since October 2020.

COMMENTS

Tim Moore, Economics Director at IHS Markit

Rising New Work

Tim Moore, Economics Director at S&P Global, which compiles the survey said: “Commercial projects helped keep construction growth at its highest level since last summer as clients boosted spending in response to the roll back of pandemic restrictions. Civil engineering also fared well in March as work on major infrastructure contracts underpinned growth. Residential work found itself in the slow lane, however, as some firms noted that greater caution crept into spending decisions.

“The construction recovery looks set to continue in the
near-term as order books improved at the fastest pace for seven months in March. Input buying and job creation in the sector also remained indicative of strong underlying momentum.

“Escalating fuel, energy and commodity prices led to the fastest rise in costs for six months. Intense inflationary pressures appear to have unnerved some construction companies. Business optimism slipped to its lowest since October 2020 on concerns that clients will cut back spending in response to rising prices and heightened economic uncertainty.”

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

Number of Roadblocks

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said: “A heartening result in March overall where new order levels were the highest since August last year, but not all the sub-sectors offered an equal contribution to output this month. Commercial projects were the most abundant with the strongest rise in almost a year, but residential building became the laggard of the pack as affordability concerns were a factor in holding back progress particularly in new housing and refurbishment work.

“The crippling rise in inflation ramped up again as transport and raw materials went up in price. Longer wait times for deliveries were reported by a third of supply chain managers. Construction companies are braced for more disruption on the horizon as a result of the Ukraine conflict. The rise in purchasing demand fed into higher costs for materials already in short supply as energy hikes also impacted on business costs.

“With these severe challenges, it is no surprise that business optimism for the months ahead has been affected and fell to levels last seen in October 2020. The sector is facing a number of roadblocks as levels of job creation were also held back with the ongoing skills shortage and lack of builders.”

Battening Down the Hatches

Gareth Belsham, director of the national property consultancy and surveyors Naismiths, commented:

Gareth Belsham National Head of Building Consultancy, Naismiths

“The gathering economic storm has yet to fully hit construction. While anxiety about the return of rapid cost inflation has dragged industry confidence down to its lowest level in 17 months, for now construction’s vital signs remain good.

“Demand remains strong, and new orders have now been in positive territory for 22 months in a row. In fact March saw new orders increase at their fastest rate since last August, and builders remain busy across the board – even if housebuilders find themselves in the unfamiliar position of being the slowest growing sector of the industry.

“That said, British builders are braced for a serious shock to their supply chain. At the start of the year Russia and Ukraine together constituted the second largest steel exporter in the world. With imports from Russia now blocked and Ukrainian production all but halted, UK steel prices are surging.

“The availability and cost of other key building materials like timber are also being severely impacted by the war in Ukraine, and a third of the construction firms polled for the PMI survey reported that delivery times for key materials are getting longer too.

“Nearly half of firms still expect business to improve during the course of 2022, but nevertheless both they and their clients are battening down the hatches as a second wave of post-pandemic inflation approaches.”

Rise in New Work Gives A Fine Month

Joe Sullivan, partner at MHA, comments:
“The UK housing sector’s continued growth in March has underpinned another fine month for the construction industry. Demand for new build homes shows no sign of abating, fuelled by mortgages remaining comparatively cheap (despite the recent base rate increase from the Bank of England). While material and labour shortages could prove potential bumps in the road ahead, the outlook for the residential sector remains very rosy.

“Sector confidence has also been boosted by some easing of supply chain issues so far this year, however the ongoing war in Ukraine is expected to put this in jeopardy. The true impact of the war and resulting sanctions on Russia will take time to materialise and as such, certain supply chains must swiftly pivot towards other sources for their materials. The Forest Stewardship Council (FSC)’s decision to remove certification of timber originating from Russia and Belarus is a prime example of the war’s impact on the sector, with architects and contractors set to face obstacles in delivering jobs on time and to specification.

“The recent Spring Statement was a golden opportunity to embolden the sector against such uncertainties. Instead, construction businesses were underwhelmed by the Chancellor’s scant announcements. A reduction in VAT on home energy efficiency products such as solar energy systems is welcome in the long run, but is highly unlikely to force hard pressed consumers to shell out now and it’s an insipid stride in the UK’s path to achieve net zero.

Hurdles to Overcome

Fraser Johns, finance director at Beard

Fraser Johns, finance director, Beard said: “Input buying and job creation, key indicators of the sectors overall health, show the sector is gaining momentum. However, there are hurdles to overcome.

“Optimism in the sector is low as inflation, combined with rising energy prices and difficulties filling jobs are potential issues on the horizon.

“These are not insurmountable though, and they even present opportunities for construction firms to revaluate their ways of operating. The skills shortage has long been an issue for the sector and construction firms need to improve diversity to change perceptions of the construction sector. By adopting inclusive practices, construction can attract people from diverse range of backgrounds which will help solve the skills shortage.

“Logistical difficulties are still a sector-wide issue and the current situation highlights the importance of supplier relations. At Beard we work closely with the suppliers, ensuring we have constant dialogue to avoid get ahead of potential issues and we pay suppliers promptly to help them avoid cashflow issues.”

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