UK Construction Output Increases as Outlook Deteriorates

UK CONSTRUCTION companies indicated an increase in business activity during October, with the overall rate of expansion improved slightly since September.

There has been a rebound in civil engineering activity due to both residential and commercial activity increasing at a slower rate.

However, less positively, new projects rose only modestly and firms were the least optimistic about growth prospects in nearly six years.

Construction Output Increases

At 53.2 in October, up from 52.1 in September, the IHS Markit/CIPS UK Construction Total Activity Index posted its second-highest level in 16 months. That said, it was still below the average of 54.3. Construction output has risen every month since April. Higher activity was linked to the start of new contracts, overseas work and a general increase in business.

Of the three categories monitored, civil engineering was the best performing segment of the season and drove the overall rate of growth in October. Having declined in both August and September, activity in the sector rose at the strongest pace since July 2017 at the start of the final quarter. Meanwhile, house building and commercial construction both increased at solid rates in October, albeit the weakest in seven and five months respectively.

In contrast to the trend seen for construction activity, latest data pointed to a slower rise in new business volumes. The rate of new contract growth was the weakest in the current five-month sequence of expansion. Some firms mentioned intense competition in the market, and delayed final decisions from clients.

Slower new order growth impacted firms’ expectations for future growth, with the business expectations index falling to a near six-year low. Alongside muted new project intakes, firms highlighted uncertainty related to Brexit and the economy as undermining confidence.

Outlook Deteriorates

Trevor Balchin, Economics Director at IHS Markit, which compiles the survey said: “New contracts increased at only a modest pace, and firms were the least optimistic regarding the 12-month outlook for nearly 6 years. Construction companies again linked uncertainty to Brexit negotiations, which influenced delays to final decisions at clients.”

In response to the slowdown in growth of incoming new projects, construction companies increased their input purchasing more cautiously. The overall volume of inputs purchased continued to rise in October, but at the slowest rate in seven months. More positively, firms continued to increase employment at a strong overall rate.

Trevor continues, “Construction firms continued to raise headcounts at a strong pace, suggesting they are not expecting an imminent contraction in demand. That said, if the new orders and expectations indices remain at current levels or fall further, the employment index could also drift back towards the 50.0 no-change mark.”

Despite the rise in inputs , delivery times for construction products and materials continued to lengthen in October and firms continued to report stock shortages at vendors.

Cost pressures in the UK construction sector remained strong in October, despite the rate of input price inflation easing to a 27-month low. Firms highlighted increased fuel, labour, timber and steel costs. Sub-contractor rates also continued to rise at a relatively strong pace during the month.

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