S&P Global / CIPS UK Construction PMI reports the slowest new construction orders growth in 2022 due to rising costs and economic uncertainty
The report stated that despite a strong rise in construction business activity during April, the speed of recovery lost momentum amid weaker new construction orders.
Essentially, UK construction companies are worried about rising costs, slowing demand and the economic outlook for the future.
In fact, optimism about future workloads is the lowest since September 2020 – the result of a slowdown in client spending, further lowering growth expectations.
The main takeaway from the survey is the following:
- Weakest rise in new work since December 2021
- Total construction output expands at slower pace in April
- Growth projections ease to lowest since September 2020
At 58.2 in April, down from 59.1 in March, the headline S&P Global / CIPS UK Construction Purchasing Managers’ Index® (PMI®) – which measures month-on-month changes in total industry activity – signalled the slowest new construction orders growth since January.
The index has nonetheless posted above the crucial 50.0 no-change mark in each month since February 2021.
The fastest growing demand is in commercial work and civil engineering
Of the three main construction segments monitored by the survey, the fastest-growing remained commercial work (index at 60.5), followed by civil engineering (56.2).
This is largely due to pandemic related pent up demand for commercial projects and spending.
HS2 and similar major infrastructure projects have undoubtedly helped to boost civil engineering activity.
It was reported that residential work remained the worst-performing sub-sector in April. It saw the greatest loss of momentum (53.8 vs. 54.9 in March).
The near-term outlook for activity deteriorated in April as total new construction orders expanded at the slowest rate for four months.
Why is the industry experiencing the slowest new construction orders growth?
- Escalating raw material prices
- Hesitancy due to higher borrowing costs
- Geopolitical uncertainty
While tender opportunities diminished in April, the need to deliver forthcoming projects and rebuild business capacity contributed to another round of job creation in April. Then, the rate of employment growth hit a three-month high and there was a steep rise in purchasing activity.
Higher levels of input buying have been recorded in each month since June 2020 but suppliers have been unable to keep up with demand for construction products and materials.
In this survey, around 45% of the panel reported longer lead times, while only 2% noted an improvement. The resulting index measuring suppliers’ delivery times across the construction sector signalled a sharper downturn in performance than in the previous month.
Supply chain delays were caused by staff, materials and transport shortages. These difficulties were often exacerbated by delays at ports and the war in Ukraine.
Furthermore, higher prices paid for energy, fuel and raw materials led to a steep increase in average cost burdens during April.
Survey respondents also noted that the removal of red diesel subsidies had pushed up costs.
The overall rate of purchasing price inflation accelerated to its fastest since September 2021.
What does the future look like?
Looking ahead, the percentage of construction companies forecasting an upturn in business activity during the next 12 months (43%) continued to surpass those expecting a fall (12%).
The gap narrowed again in April, however, and as a result the Future Activity Index dropped to a 19-month low.
Construction companies cited risk aversion among clients and persistently high inflation due to energy price rises. Additional concerns included squeezed household incomes and rising borrowing costs.
‘The construction sector is moving towards a more subdued recovery phase as sharply rising energy and raw material costs hit client budgets’
Tim Moore, economics director at S&P Global, which compiles the survey, said:
“The construction sector is moving towards a more subdued recovery phase as sharply rising energy and raw material costs hit client budgets. House building saw the greatest loss of momentum in April, with the latest expansion in activity the weakest since September 2021. Commercial and civil engineering work were the most resilient segments, supported by COVID-19 recovery spending and major infrastructure projects respectively.
“Construction companies have built up strong order books since the reopening of the UK economy, which led to another round of rising employment in April and these project starts should keep the sector in expansion mode during the remainder of the second quarter. “However, tender opportunities were less plentiful in April as rising inflation and higher borrowing costs started to bite. Consequently, longer-term growth projections have slumped from January’s peak, with business optimism now the weakest since September 2020.”
‘A slowdown in output growth amongst builders in the UK has highlighted a number of issues to be concerned about’
Group director at the Chartered Institute of Procurement & Supply, Duncan Brock, added:
“A slowdown in output growth amongst builders in the UK has highlighted a number of issues to be concerned about including rising costs, shortages and a hesitancy amongst customers.
“New order levels rose at the slowest pace since the end of last year. There were fears around disrupted supplies as 45% of supply chain managers reported longer lead times. To counteract some of these challenges and with an eye on the future, supply chain managers were building stocks resulting in another sharp rise in purchasing activity.
“Inflation hit the highest rate since September 2021, impacted on budgets and made customers think twice about committing. Job creation grew quickly to complete work in hand, risking over-inflating capacity should new order growth slow further. With the Bank of England confirming the interest rate as the highest for 13 years, the squeeze on business lending also led to a relatively gloomy outlook amongst builders for the year ahead, with sentiment the lowest since September 2020.”
‘Russia’s invasion of Ukraine continues to be responsible for some staggering prices increases’
Brendan Sharkey, head of construction and Real Estate at MHA, made the following contribution:
“The UK construction sector continues to ride a wave of strong demand. However, construction work is now less profitable due to inflation and interest rate rises. Russia’s invasion of Ukraine continues to be responsible for some staggering prices increases. We’ve seen the price of certain raw materials surge by 20% or more within a month.
“Hopefully employers and larger construction firms will be sympathetic to the struggles of smaller businesses. If they are not, we may see more than a few casualties. In the long term, the sector may experience a decline in new civil engineering, commercial and industrial projects as businesses and investors start to hold back on new orders until price stability returns and there is more economic certainty.
“Housing is a bright spot, especially outside of London. Despite the cost of living crisis, housing demand shows little signs of slowing, boosted by high levels of employment across the economy. The rising cost of living and of increasing mortgage costs will surely start to bite soon, but even then demand for new build homes should continue to be strong. Compared to second-hand properties newer builds are generally more energy efficient thereby saving running costs but also avoiding potentially expensive energy refurbishment in years to come.
“The government can do very little to support the sector at this time. It has already stimulated demand through infrastructure projects, including HS2, and work generated to meet the standards set by the Energy Performance Certificate (EPC) action plan. The big question is how businesses can meet this demand while also addressing rising costs. Now would be a good time to reassess delivery models to identify potential cost-savings. Firms also need to be vigorous in negotiating and renegotiating contracts. Rampant inflation means a job that looked profitable one month will be loss-making the next.”