Cautious Optimism as Construction Growth Increases

Growth in the UK construction sector gained momentum during May, with activity and new business increasing at sharper rates than in April. Rising workloads prompted renewed expansions in purchasing activity and employment, while business confidence also strengthened.

Supply-chain conditions continued to improve amid reports of good stock availability at vendors. This contributed to the pace of input cost inflation slowing to a marginal pace.

The headline S&P Global UK Construction Purchasing Managers’ Index™ (PMI^®) – a seasonally adjusted index tracking changes in total industry activity– posted above the

50.0 no-change mark for the third month running in May to signal a sustained expansion in activity midway through the second quarter of the year. Moreover, the index rose to 54.7 from 53.0 in April, pointing to a marked increase in activity that was the fastest for two years.

For the first time since May 2022, all three monitored categories saw activity increase during the month as housing activity returned to growth. The expansion in activity on residential projects was only marginal, however. The sharpest increase in activity was seen in the commercial category where the rate of growth accelerated to a two-year high. Meanwhile, civil engineering activity rose at a solid, but slightly softer pace.

According to respondents, the latest increase in total construction activity reflected sustained growth of new orders. New business rose for the fourth consecutive month, and at a solid pace that was the fastest for a year as demand conditions improved. In particular, firms linked higher new orders to the winning of new contracts and the commencement of previously delayed projects.

With new order growth sustained midway through the second quarter, construction firms increased employment for the first time in five months. Although only modest, the pace of job creation was the sharpest since last September.

COMMENTS:

Andrew Harker, Economics Director at S&P Global Market Intelligence, said:

“The UK construction sector looks to be building good momentum as we approach the middle of 2024, highlighted by activity increasing at the fastest pace in two years during May. Particularly pleasing was the broad-based nature of the rise in activity as work on housing projects increased for the first time in more than a year-and-a-half.

“Firms are gearing up for further growth in the months ahead, posting renewed expansions in both employment and purchasing activity as workloads increase.

“Moreover, the supply-chain environment continued to improve in May. Companies were able to secure inputs much more quickly than in April and at prices that were only slightly higher than in the previous month on average. These factors should help constructors in their efforts to ramp up operations in line with greater new order inflows.”

Jordan Smith, technical director at Thomas & Adamson, said:

“The Construction PMI figures are encouraging, but there is a lot going on beneath the surface. We’re certainly beginning to see more stability and signs of future growth. However, the market is still challenging, with a number of projects either being paused, pushed out, or held at early design stages because of issues relating to cost, viability, and the level of returns on investment.

“Cost increases are stabilising, but they are still on the rise, driven by material shortages, a tight labour market, and limited supply chain capacity. Careful consideration towards cost management and the overall approach to projects remains key to mitigate risk.

“Mechanical and electrical services are still being particularly affected, with continued anticipated cost increases greater than other trades causing budgetary issues on a number of projects. This is largely due to material and labour shortages and limited capacity within specialist supply chain resources.

“Levels of activity are generally mixed across different sectors. Whilst we are seeing a lot happening in refurbishment, commercial fit out, and the public sector, for example, there are challenges identifying suitable sites for residential developments despite the strong levels of demand outweighing supply. Reductions to NHS budgets have hit the development of new facilities planned in the healthcare sector too.

“Nevertheless, looking ahead we are cautiously optimistic about the remainder of 2024.”

Fraser Johns, finance director at Beard, said:

“A two-year high in activity in the commercial sector certainly makes for fantastic reading – as does positive performances across construction more broadly. In particular, a return to growth in housing will be most welcome for those firms reliant on the sector, who have endured considerable challenges as supply has waned.

“From our viewpoint, clients certainly haven’t been shy in committing to new projects, and both regional and national frameworks continue to provide us with a healthy pipeline of new work. We are really encouraged by the prospects for the remainder of the year, particularly given the momentum we are seeing in the commercial space.

“Of course, with a date now set for the general election, some clients may well take a wait and see approach before making any big commitments. It will also be interesting to see what impact this has on infrastructure new work with potential changes to public sector spending. Nonetheless, it’s still positive to see firms across the sector gearing up for growth and expecting a positive second half of the year. We are certainly in this camp at Beard with strong order books across our five regional offices.”