November data from the Markit/CIPS UK Construction Purchasing Managers’ Index indicated that the UK construction sector continued to rebound from the weak patch recorded on average during the third quarter of 2016.
Business activity and incoming new work increased at the strongest pace since March, although both rates of expansion remained much softer than the peaks achieved at the start of 2014. Greater workloads underpinned a further solid rise in employment levels and input buying among construction firms. However, average cost burdens rose sharply, with the rate of inflation the steepest since April 2011.
“Input cost inflation accelerated to its fastest for five-and-a-half years, driven by sharply rising imported raw material prices,” said Tim Moore, Senior Economist at IHS Markit and author of the Markit/CIPS Construction PMI. “A number of firms cited uncertainty related to supplier price hikes as an emerging threat to the construction sector, with survey respondents commenting on difficulties forecasting project costs against a backdrop of rapidly changing inflationary pressures.”
The seasonally adjusted Markit/CIPS UK Construction Purchasing Managers’ Index® (PMI®) picked up slightly to 52.8 in November, from 52.6 in October, thereby signalling an expansion of total business activity for the third month running.
Reports from survey respondents cited improved order books, alongside resilient client confidence and strong demand for residential projects. There were again reports that heightened economic uncertainty was a key factor weighing on output growth across the construction sector.
Housebuilding activity remained the best performing category of construction output during November, despite the pace of expansion slipping to a three-month low.
“Once again residential activity led the way, though at softer rates than those seen in October and at a more diminished rate than the survey’s long-range norm,” said David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply. “Though this positive growth will provide some relief for the economy, continuing cost pressures will be a worry for the sector in the coming months.”
The impact of the weaker pound was widely felt in November, with cost inflation the strongest since early-2011. Higher prices were reported for a number of materials including bricks, blocks and slate, as businesses struggled with managing costs. Yet, in spite of this grip on precious margins, headcounts were increased and demand for sub- contractors was also sustained.
“The latest rise in incoming new business was the strongest since March and contrasted with a sustained decline in sales through the summer,” said Noble. “Some construction firms noted that their workloads had been boosted by a resumption of projects that were delayed after the Brexit vote. However, there were also reports that the stronger inflation backdrop had led to intense competitive pressures and squeezed margins.
“Reports of lingering uncertainty around the progress of Brexit negotiations had business optimism divided, where only 45% of respondents expected a rise in activity next year – one of the lowest since the middle of 2013. And, as commentators warn about more inflationary impacts next year, the sector will be concerned that decisions from policymakers must ensure these effects are minimalised so that growth is maintained.”