Construction cost pressures at eight-and-a-half year high

Housebuilding activity expanded at its slowest pace for six months, as suppliers battled material shortages and a weak exchange rate.

UK construction companies recorded a sustained expansion of overall business activity in February, however housebuilding increased at the slowest pace for six months. The latest Markit/CIPS UK Construction PMI revealed a further solid expansion of employment numbers, despite a slowdown in new business growth to its weakest for four months.

“Housing was singled out as a drag with its weakest performance for six months,” said Duncan Brock, Director of Customer Relationships at the Chartered Institute of Procurement & Supply. “As a previous driver of growth, there will be concerns about this softening of housebuilding activity. The drop in sub-contractor availability was the largest seen since January 2016, against a backdrop of rising employment numbers across the construction sector, which will add to worries around labour market capacity as we move along the path to Brexit.

Meanwhile, intense cost inflation persisted in February, which was overwhelmingly linked to higher prices for imported materials. ““Suppliers were challenged this month as they groaned under the weight of higher demand and some material shortages, with the sharpest drop in performance since June 2015,” said Brook. “This impacted on the sector’s overall pace of activity, as delivery times lengthened for bricks, blocks and roofing tiles.”

At 52.5 in February, up slightly from 52.2 in January, the seasonally adjusted Markit/CIPS UK Construction Purchasing Managers’ Index registered above the neutral 50.0 threshold for the sixth consecutive month. However, the rate of output growth remained weaker than its post- referendum peak (54.2 in December 2016) and subdued in comparison to the trends seen over the past three-and-a-half years.

Survey respondents noted that the resilient economic backdrop and a stabilisation in client confidence since the EU referendum continued to help drive construction growth in February.

However, there were also reports that demand growth had softened so far in 2017. Reflecting this, incoming new work increased only marginally and at the slowest pace since last October. Some construction companies noted that sharply rising input costs had an adverse impact on decision-making and contributed to delays in contract completions.

February data indicated that construction companies remain upbeat about their growth prospects for the next 12 months, with almost half (48%) forecasting a rise in business activity and only 13% expecting a decline. The degree of positive sentiment was stronger than seen on average in the second half of 2016, but weaker than January’s 13-month peak.

Strong demand for housebuilding projects was cited as a key factor likely to boost construction output.

Robust business confidence contributed to sustained staff hiring across the construction sector in February. Sub-contractor demand also picked up during the latest survey period, which contributed the sharpest drop in sub-contractor availability since January 2016.

Input buying increased again in February, although the rate of expansion was only marginal. Construction companies also reported the second-fastest rise in input costs since August 2008. Survey respondents noted higher prices for a range of materials, driven by the weak sterling exchange rate against the US dollar and euro.

Tim Moore, Senior Economist at IHS Markit and author of the Markit/CIPS Construction PMI, said, “February’s survey data highlights that the UK construction sector has rebounded from its post- referendum soft patch but remains on a relatively slow growth trajectory. Weaker momentum in the housebuilding sector was a key factor weighing on construction growth, alongside a renewed fall in work commercial projects.

“February data revealed that input cost inflation remained at levels last seen in the summer of 2008. Suppliers’ efforts to pass on rising energy costs and global commodity prices have been amplified by the weak sterling exchange rate.

“But overall, the sector’s optimism was still high as workloads remained strong, propped up by the prospect of new projects and repeat business. Though the level of new orders was modest, it is the relentless and brutal rise in prices for construction materials, combined with the impact of the weaker pound, that could block the sector’s progress in the coming months.”

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