CONSTRUCTION OUTPUT DECLINES FOR THE FIRST TIME SINCE JAN’ 2021

S&P Global/CIPS UK Construction PMI^®

KEY FINDINGS

Civil engineering and housing activity fall in July

Commercial work expands at weakest pace for 18 months

Supplier delays least widespred since February 2020

 

COMMENTS:

Tim Moore, Economics Director at S&P Global Market Intelligence, which compiles the survey

“July data illustrated that cost of living pressures, higher interest rates and increasing recession risks for the UK economy are taking a toll on construction activity. Total industry output fell for the first time since the start of 2021 as civil engineering joined house building in contraction territory. Only the commercial segment registered growth in July, supported by strong pipelines of work from the reopening of hospitality, leisure and offices.

“More positively, input cost inflation has retreated from the peak seen this spring as lower commodity prices and supply improvements gradually filter through to buyers of construction products and materials. The latest round of purchase price inflation was the least marked for 16 months, despite sustained pressure from escalating energy costs and staff wages, while supplier delays were the least widespread since the pandemic began.

“Expectations for output growth in the next 12 months are far less exuberant than those seen over the past two years, amid concerns that elevated inflation and higher borrowing costs will constrain demand. Nonetheless, the degree of construction sector optimism picked up slightly since June, which ended a five-month period of falling confidence.”

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

“After several months of difficult conditions for builders, these challenges have now resulted in a contraction in construction with the biggest fall in activity since May 2020.

“This disappointing result was felt across all the sectors, including housing which had demonstrated more resilience over the last couple of years, but fell for the second month in a row in July. However, it was civil engineering that fell the hardest and furthest. With fewer new orders in the offing, it may be some time before we see a rebound in this sector bearing in mind the time lag of infrastructure projects.

“Builders optimism remained at the lowest levels seen for two years. Job creation was healthy to complete work in hand but the danger remains that should the UK economy turn unfavourable, this will affect job hiring and the development of key skills. A feather-like fall in prices may ease some of the pain as access to raw materials also improved, but prices at historically high levels will continue to hamper activity in 2023.”

Brendan Sharkey, Head of Construction and Real Estate at MHA

“The UK construction sector continues to ride a wave of strong demand, despite the persistent pressures of inflation, labour shortages and the cost of living crisis. Prices have stabilised for some basic materials such as timber, bricks and certain steel products. Overall, businesses have adapted to the inflationary landscape including changing their methods of purchasing thereby bolstering performance across the sector.

“Housing demand, particularly outside of London, continues to be fuelled by an increase in disposable income due to the switch to remote working and high levels of employment. The levelling up agenda and Commonwealth Games have also played a role, positively showcased cities including Birmingham and Leeds as great places to live, contributing to the housing boom in these regions.

“However, in the months ahead housing demand will inevitably decline as the cost of living crisis continues to bite. Today’s expected interest rate rise, which could see the base rate increase by 50 basis points, alongside increased travel costs, general inflation and reduced employment will also prompt many consumers to put their needs for a new house on the back burner.

“Many businesses will be closely monitoring developments in the conservative leadership election over the month ahead. A reduction of the planned 25% corporation tax cut, a review of the HS2 extension and reduction of red tape on building new homes (mooted by both candidates) would help the sector power through the difficulties ahead. Yet for now, this just remains speculative and come September it may be a very different story.”

Fraser Johns, Beard finance director

“The largest fall in construction activity since February 2020 confirms the view that the next 18 months is likely to be slower for the sector.

“However, there is also an element of market correction taking place as the pent-up demand following the pandemic begins to subside. This is probably why commercial work – which bucked the downward trend – is expanding at its weakest pace for 18 months.

“The reduction in supplier delays is encouraging, the continued delays on some imported items from China and Europe remain a concern.

“Skills shortages continue to be an issue for our sector. Recruitment of staff is a challenge for all industries. We are working hard to attract a diverse and inclusive workforce by offering incentives and opportunities for development at all levels, from apprenticeships to senior managers.”