New Order Growth Slows to Weakest since June 2020

CONSTRUCTION activity in the UK dipped for the second month in August as new order growth continues to slow down and customer demand moves closer to stagnation amid cost pressures and economic uncertainty.

Concerns about wider economic prospects led to a drop in business confidence and slower job creation, while firms’ purchasing activity declined.

Falling buying activity did alleviate some pressure on supply chains, with lead times lengthening to the least extent in two-and-a-half years, while inflationary pressures also showed signs of waning.

The headline seasonally adjusted S&P Global / CIPS UK Construction Purchasing Managers’ Index (PMI) – which measures month-on-month changes in total industry activity – was at 49.2 in August, up fractionally from 48.9 in July but still below the 50.0 no-change mark and thus signalling a reduction in construction activity over the month. Activity has now decreased in two consecutive months.

As was the case in July, civil engineering posted the sharpest decline in activity of the three monitored categories, seeing output fall markedly over the month. Commercial activity also declined, thereby ending a period of growth stretching back for a year-and-a-half.

Increase in Housing Projects and New Orders 

On a more positive note, activity on housing projects increased for the first time in three months, albeit fractionally. While some firms increased activity in response to ongoing growth of new orders, this was outweighed by those constructors that saw output decline as firms adjusted to signs of demand weakening.

New orders increased only marginally in August, and to the least extent since June 2020. Some respondents indicated that customers were holding back on committing to new orders amid cost pressures.

Alongside inflationary pressures, concerns around the potential for a wider economic downturn also impacted the sector in August. Business confidence dropped in July and was well below the series average.

In some cases, concerns around the wider economic environment impacted hiring decisions. Although rising new orders, the clearing of backlogged work and the filling of previously vacant positions kept employment rising solidly, the rate of job creation eased to the softest since March 2021.

Signs of a Slowdown

Construction firms scaled back their input buying for the first time since the initial wave of the COVID-19 pandemic, again reflecting signs of a slowdown. There were also some reports that less pronounced price and supply pressures reduced the need to build inventories.

In fact, the reduction in pressure on suppliers meant that vendor lead times lengthened to the least extent for two-and-a-half years in August. Where delivery times did lengthen, panellists attributed this to shortages of certain materials.

In line with the picture for supply-chains, there were also signs of inflationary pressures moderating midway through the third quarter. Input costs continued to increase sharply, often due to higher fuel prices, but the rate of inflation softened to the weakest since February 2021. Similarly, the pace of increase in sub-contractor rates also softened, and was the slowest in 16 months.

As well as scaling back purchasing and slowing the rate of job creation, construction firms kept their usage of subcontractors unchanged in August. This ended an 18-month sequence of expansion. Meanwhile, the rate of subcontractor availability continued to fall sharply, and to the largest degree in six months.

COMMENTARY

Andrew Harker, Economics Director at S&P Global Market Intelligence, which compiles the survey said: “The UK construction sector looks set to be in for a challenging period, according to the latest PMI data.

“Not only did construction activity fall for the second month running, but a range of indicators from the survey pointed to further weakness ahead. New orders slowed to a crawl, while concerns about the sector and the wider economy led to a drop in confidence.

“Activity weakness was broad-based in August, with none of the three monitored categories immune to the wider slowdown. Commercial activity dropped into contraction for the first time in just over a year-and-a-half, and while housing activity ticked higher, the segment has been in broad stagnation over the past three months.

“Price and supply pressures showed further signs of easing as waning demand throughout the sector lifted pressure on suppliers. Meanwhile, the main positive from the latest survey was a solid increase in employment. That said, hiring at least in part reflects an ongoing catch-up following the pandemic. If activity continues to fall, firms will likely soon feel that their staffing capacity is sufficient and pause hiring.”

Dr John Glen, Chief Economist at the Chartered Institute of Procurement & Supply

Dr John Glen, Chief Economist at the Chartered Institute of Procurement & Supply (CIPS), said: “The UK construction sector is poised for contraction once again as rising prices for raw materials worldwide filtered into UK supply chains. Just 14 months since the sector’s recent peak as part of the recovery from the pandemic, inflation is seeing housing and commercial building stagnate with civil engineering activity dropping significantly.

“There is some consolation for the sector as it readies itself for a future of high energy costs, however. Lower demand is leading to fewer purchases, downward pressure on input costs and more responsive supply chains. Together, these trends could eventually help to reverse inflation, but a prolonged dip in new orders will be a bitter pill for the sector to swallow.”

INDUSTRY REACTION

Recessionary Vice

Gareth Belsham National Head of Building Consultancy, Naismiths

Gareth Belsham, of property consultancy and surveyors Naismiths, said: “As the recessionary vice begins to close on the UK economy as a whole, the construction industry’s brakes are being squeezed harder and faster than most.

“The industry has now spent two months in contraction territory, with both infrastructure and commercial property construction activity shrinking in August. Housebuilders provided a rare glimmer of light after residential activity ticked up for the first time in three months.

“But the flood of new orders seen at the start of the year is slowing to a trickle. New orders barely rose in August, and growth is now at the lowest level seen since the depths of the 2020 summer lockdown.

“Business confidence among construction firms, which typically provide a canary in the coalmine for the wider economy, continues to decline and August saw Britain’s builders reduce their orders for materials and scale back recruitment.

“This cooling of demand did ease some of the inflationary pressure though, and input cost inflation has now dipped to its lowest level for 18 months.

“Looking ahead, rising interest rates are likely to make some developers reassess their plans and will eventually cool demand from housebuyers too.

“For now, most construction firms are busy and order books remain relatively full – but the picture for 2023 is looking increasingly grim.”

Paralysis

Joe Sullivan, MHA Partner

Joe Sullivan, partner at MHA, said: “The industry has managed to maintain growth since early 2022 until the tables turned last month. The summer holiday season and the paralysis of government over the past 6 weeks have stunted the industry, especially the civil engineering sector. The contraction does not look like it will begin to abate any time soon.

“The number one priority must be to guard against soaring energy costs causing a rash of business failures in the sector. The new Prime Minister Liz Truss could take two measures immediately to help: reinstate the red diesel rebate and provide additional support for the most energy intensive aspects of the sector, such as aggregate, asphalt and cement businesses. These measures would help curtail the inflationary pressures throughout the supply chain.

“The labour market remains very tight. Skilled tradespeople increasingly shop around and work where the pay is highest which serves as an added stimulant to wage inflation. The Construction Industry Training Board (CITB) recently stated a larger number of workers are needed to deliver on industry demand in the medium term. The concern is that when businesses are focussed on survival recruitment, training and skills development may all suffer, storing up further issues for the future.”

Bold Solutions

Brian Berry, Chief Executive of the Federation of Master Builders

Brian Berry, Chief Executive of the FMB said: “This new construction data shows that the industry has returned to its pandemic levels of activity. As the cost-of-living crisis deepens, consumers are cutting back, but builders also face increased costs on materials. This creates a difficult and clearly damaging situation.

“Bold solutions are required by the new Government under Liz Truss. Delivering a UK wide retrofit strategy to improve the efficiency of the nation’s homes would be a huge boost for local builders and local economies alike. It would also cut homeowners bills and help ensure the UK’s energy security. More immediately we urge the Government to remove VAT on repair, maintenance and improvement work so that savings can be passed on to cash strapped consumers.”

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