Builders feel the pressure in January, as UK construction output drops

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UK construction output dropped slightly in January, as the third national lockdown leads to hesitancy across the industry

January PMI® data compiled by IHS Markit indicated a marginal decline in UK construction output, which ended a seven-month period of expansion.

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.

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 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.

Figure breakdown

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).

The latest increase in housebuilding 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 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.

Construction companies continued to experience intense cost pressures, driven by rising prices for plaster, steel and timber.

‘Two steps forward and one step back for builders’

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: “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.”

Dodging the ‘Brexit bullet’

Brendan Sharkey, head of construction and real estate at MHA MacIntyre Hudson, commented: “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 housebuilders, 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 accommodations. As a consequence, there has been a lot of liquidity in the housing market, with plenty of buyers and sellers.

“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.”

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