Marginal Rise for Construction in January

JANUARY DATA pointed to a loss of momentum for the UK construction sector, with business activity growth easing to its weakest for ten months.

New orders increased only marginally at the start of 2019, which contributed to the slowest expansion of employment numbers for two-anda-half years.

A number of survey respondents noted that Brexit uncertainty had led to hesitancy among clients and a corresponding slowdown in progress on new projects.

Marginal Rise for Construction

The headline seasonally adjusted IHS Markit/CIPS UK Construction Total Activity Index dropped to 50.6 in January, from 52.8 in December. The index has posted above the 50.0 no-change mark in each month since the snow related decline seen in March 2018, but the latest expansion was the weakest seen over this ten-month period of growth.

All three categories of construction output recorded weaker trends than those reported in December. Residential work was the strongest performing area, although the latest expansion was only modest and the slowest seen since March 2018.

Civil engineering activity increased marginally, with the rate of growth much softer than December’s 19-month high. Commercial work was the weakest performing area of construction output in January. Latest data indicated a decline in work on commercial construction projects for the first time in ten months.

Anecdotal evidence suggested that Brexit-related anxiety and associated concerns about the domestic economic outlook continued to weigh on client demand. New business growth eased to an eight-month low in January.

Construction firms widely commented on softer demand conditions and longer sales conversion times, reflecting a wait-and-see approach to spending by clients. Concerns about the near-term outlook for new projects resulted in more cautious staff hiring policies at the start of 2019. The latest survey pointed to the slowest rise in employment numbers since July 2016.

Meanwhile, slower growth of input buying helped to reduce pressure on construction supply chains in January. The latest deterioration in vendor performance was the joint-weakest since September 2016. Construction firms also pointed to the smallest reduction in sub-contractor availability for two-and a-half years.

Input price inflation continued to moderate in January, with average cost burdens rising at the slowest pace since June 2016. Where an increase in purchasing costs was reported, this was generally linked to rising prices for imported construction products and materials.

Outlook

Construction firms remain positive about the outlook for business activity in 2019. Around 41% of the survey panel anticipate a rise in output, while only 16% forecast a fall. However, the resulting index signalled a moderation in optimism since December. Large-scale civil engineering projects were cited as a key source of optimism, while and Brexit uncertainty was the most commonly cited concern.

Optimism in Short Supply

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply commented: “Brexit continues to hamper progress and dampen client confidence. Residential building, the stalwart of the sector leading the way in the last six months, lost its momentum with the weakest performance since March 2018. However, commercial building suffered the most of the three subsectors declining for the first time in just under a year. Larger orders were held back by clients and overall activity slowed.

“The biggest shock came in the form of job creation which has managed to suffer the slings and arrows of Brexit highs and lows with solid hiring since the referendum result. Employment rose at the slowest rate since July 2016 and with optimism also in short supply, the sector only needs a small nudge to tip it closer to recession.”

Political Uncertainty is the Enemy

Brian Berry, Chief Executive of the FMB

Brian Berry Chief Executive of the FMB, added: “Political uncertainty is the enemy of construction firms that rely on the spending power of homeowners to commission home improvement projects. The UK is set to leave the EU next month, and yet we are still none the wiser about what the future holds. Given these intense headwinds, it should not be surprising that the sector suffered such a sharp decline.”

Berry continued, “Alongside the political uncertainty, the cost of doing business is also rising for construction firms up and down the country. Material prices have been rising steadily since the depreciation of sterling following the EU referendum. Looking ahead, material prices are expected to continue to cause a headache for the construction industry.

“What’s more the construction skills crisis means that key trades are extremely difficult to recruit and the upshot of this is rising wages in construction. Tradespeople know they can command higher salaries than they did previously as workers are scarce, and this means a squeeze in margins for firms. This will only worsen if the post-Brexit immigration system that the Government has planned goes ahead. If the sector isn’t able to draw upon crucial EU workers of all skill levels, who have so far served to mitigate this shortage, the slowdown of growth will continue.”

Quiet Housing Market

Brendan Sharkey, Head of Construction and Real Estate at MHA

Brendan Sharkey, Head of Construction and Real Estate at MHA MacIntyre Hudsonadded:“There’s no getting away from construction’s dependence on European workers and materials, and it’s actually the larger companies with the biggest problem. The larger the company, the more likely it is to bid for irregular contract work and to depend on European workers.

“Smaller regional firms tend to employ less European labour, and treat their subcontractors akin to regular employees.

“The housing market is quiet, especially in London, where it’s not clear there would be much activity at all were it not for Help to Buy. Activity has certainly declined since this time last year and suppliers are turning off the tap and waiting for demand to pick up. This has led to suspicions of land banking, but developers can’t afford to have expensive properties sitting on the market.

“In the civil engineering sector companies want to put profit over turnover, but it remains uncertain whether this can be achieved. Carillion took capacity out of the market; in theory this could have allowed some big firms to regroup, but government projects have also dried up, adding to the sector’s challenges.”

Politicians Must End the Impasse

Mike Cherry, National Chairman, Federation of Small Businesses

FSB National Chairman Mike Cherry said: “Spiralling employment costs, skills shortages and a weak pound have made it increasingly tough for small construction firms to grow in recent years.

“Today’s PMI brings into sharp relief the impact that political uncertainty is having on one of our most important sectors.

“Small business confidence is at a seven-year low. Two-thirds of firms are not planning to increase investment and, with inward migration from the EU down, more than a third say lack of the right staff is holding them back. A lot of small construction firms rely heavily on mid-skilled employees from Europe.

“To be less than 60 days out from Brexit day and still have no idea what business environment we’ll be operating in on 30 March is completely debilitating. Politicians from all sides of the house must work together to end the impasse.

“Come the beginning of April, small construction firms will not only have Brexit to think about but also Making Tax Digital, rising pressure on wages, higher auto-enrolment contributions and further business rates hikes. It’s a flashpoint that could threaten the futures of many.”

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