A MARGINAL DECLINE in UK construction output, ending a seven-month period of expansion, is reported in the January 2021 PMI data compiled by IHS Markit.

The latest survey also signalled a slowdown in new order growth to its weakest since June 2020.

Construction companies often noted that the third national lockdown and concerns about the near-term economic outlook had led to greater hesitancy among clients, especially for new commercial projects.

Meanwhile, transport shortages and delays at UK ports resulted in another severe downturn in supplier performance during January. Around 45% of the survey panel reported longer lead times for the delivery of construction inputs, while only 1% noted an improvement.

At 49.2 in January, down from 54.6 in December, the headline seasonally adjusted IHS Markit/CIPS UK Construction Total Activity Index signalled a decline in overall construction output for the first time since May 2020. However, the rate of contraction was only marginal.

Slowest monthly rebound

A renewed fall in commercial activity (index at 46.2) and another drop in work on civil engineering projects (45.0) stood in contrast with strong growth in the residential category (57.1). Nonetheless, the latest increase in house building was the slowest since the rebound began in June 2020.

New business volumes rose slightly in January, but the rate of expansion lost considerable momentum since the end of 2020. Survey respondents mostly commented on delayed projects in the commercial segment due to the impact of the pandemic, while some also cited less favourable demand conditions for residential work.

Employment numbers dropped in January, which reversed the marginal expansion seen during December. Job cuts were primarily linked to the non-replacement of leavers following project completions.

Purchasing activity increased for the eighth consecutive month in January, although the rate of growth eased further from November’s recent peak. Strong demand for construction inputs and ongoing transportation issues resulted in the steepest downturn in supplier performance since May 2020.

Intense cost pressures

Construction companies continued to experience intense cost pressures, driven by rising prices for plaster, steel and timber. The overall rate of input price inflation accelerated to its highest for just over two and-a-half years.

Finally, latest data indicated that business expectations for the year ahead remained positive in January. However, the degree of confidence eased to a three-month low.

Tim Moore, Economics Director at IHS Markit

Tim Moore, Economics Director at IHS Markit, which compiles the survey, said: “The construction sector ended a seven-month run of expansion in January as a renewed slide in commercial work dragged down overall output volumes. House building was the only major construction segment to register growth, but momentum slowed considerably in comparison to the second half of last year. “Construction companies continued to report major delays with receiving imported products and materials from suppliers, with congestion at UK ports contributing to the sharpest lengthening of delivery times since May 2020. Adding to the squeeze on the construction sector, rising steel and timber costs led to the fastest rate of input price inflation for just over two-and-a-half years.

“The latest survey highlighted that construction companies have become more cautious about the business outlook. Output rebounded quickly after stoppages on site at the start of the pandemic, but hesitancy among clients in January and worries about near-term economic conditions resulted in a dip in growth expectations for the first time in six months.”

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

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply adds: “Builders were feeling the pressure in January as new order growth across the sector fell sharply to the slowest expansion rate since June last year and the commercial sector particularly acted as a brake to sustained recovery.

“Clients hesitated to commit to new workflows because of concerns around the vitality of the UK economy which in turn brought cautious job hiring and obliterated the gains made in employment numbers in December. The residential sector had been relatively immune to the effects of lockdowns and pandemic disruptions but it too was beginning to show signs of weakness for the first time in over six months.

“Progress in the sector feels like two steps forward and one step back for builders, as the shortages and the longest delays in supply chains since May affected optimism and led to the sharpest rise in building costs since June 2018.”

Industry comments

Dodged Brexit Bullet

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

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

“The outlook for the construction sector in the short term is fairly mixed. Residential builders are doing well and seem to have dodged the Brexit bullet. Indeed, there has been no major impact from the UK’s exit from the transition arrangements with the EU on 1 January 2021 other than the sourcing of materials. In other areas clouds remain and there is uncertainty regarding the sector’s prospects for the year.

“For house builders, the reduced Stamp Duty Land Tax (SDLT) rate has been a massive help but demand is also being supported by the increase in the number of people working from home and seeking more spacious accommodation. As a consequence, there has been a lot of liquidity in the housing market, with plenty of buyers and sellers.

“The end of the reduced rate for SDLT on 31 March might be thought to pose problems. Ideally, house builders would like the reduced rate to continue beyond March but the sentiment in the sector is that while the cut has been of great benefit demand will remain strong without it. Other reasons for optimism are that the use of the government’s furlough scheme is far less prevalent than it was in 2020 and construction workers who are laid off on one site can usually secure work on another quickly.

“There are some fears about material shortages, which result from a combination of new Brexit barriers and supply problems caused by Covid-19. As yet we have not seen a big impact, but contractors need to think ahead. Some increased stocks pre-Brexit to cover potential shortages, now they may need to look for materials from more than one supplier.”

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

Difficult times

Brian Berry, Chief Executive of the FMB, said: “These are difficult times for builders who are weathering a storm of product delays, material prices rises and a drop in consumer confidence. The Government has been clear that construction should stay open, and local builders stand ready to support our economic recovery. But they need greater support to build back better and greener across the country, as shown by today’s figures and echoed in the FMB’s State of Trade research.”

“The Chancellor must scrap reverse charge VAT immediately, a damaging new tax policy that will cut cashflow by around 20% for my members. A three-month extension to the Stamp Duty holiday would help address the slowdown in house building, avoiding sales falling through and consumers being priced out of their dream homes.

“Finally, the Chancellor should cut VAT on home improvement works. We have never demanded more from our homes, and they must be adapted to the ‘new normal’. They must also be upgraded with green measures, delivered according to a National Retrofit Strategy for all our homes. This will set us on the road to net zero carbon emissions by 2050. Cutting VAT will unlock additional capital to invest back into our greatest assets.”