Housebuilding activity hits 11-month high

UK construction companies ended 2016 on a positive note with the fastest rise in new order volumes since January 2016, according to the Markit/CIPS UK Construction Purchasing Managers’ Index (PMI).

Residential building activity remained the best performing sub-category at the end of 2016. Moreover, the latest expansion of housing activity was the fastest since January. “Housebuilding remains a key engine of growth for the construction sector, with the latest upturn the fastest for almost one year,” said Tim Moore, Senior Economist at IHS Markit and author of the Markit/CIPS Construction.

However, the construction sector continued to experience intense cost pressures as suppliers passed on higher imported raw material prices. December data indicated that exchange rate depreciation continued to drive up input prices across the UK construction sector. The latest increase in average cost burdens was the fastest since April 2011.

At the same time, supplier lead-times continued to lengthen, with the latest survey pointing to the most marked deterioration in vendor performance since June 2015. Some construction firms noted that forward purchasing had resulted in low stocks among suppliers.

“Prices continued on their upward inflationary trajectory, at the strongest rate for five and a half years,” said David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply. “In response, firms have increased their stock buying to not only fulfil new orders, but also to counteract anticipated price increases throughout the year, as inflationary pressures are set to continue and the weakness of the pound persists. Stock levels at suppliers were also under pressure, as vendor performance deteriorated to the greatest extent since June 2015.”

At 54.2 in December, up from 52.8 in November, the seasonally adjusted Markit/CIPS UK Construction PMI signalled a robust and accelerated expansion of overall construction output. The headline index has now posted above the 50.0 no-change mark for four months running, and the latest reading signalled the fastest pace of expansion since March 2016. Anecdotal evidence suggested that improving order books and a general rebound in business conditions had helped to lift construction output in December.

New business volumes expanded at the strongest rate for 11 months in December, which marked a sustained recovery from the soft patch seen in mid- 2016. Reports from survey respondents cited rising client demand and a resilient economic backdrop.

Greater workloads encouraged a further solid increase in staff recruitment across the construction sector. The latest rise in employment was the fastest since May, but still much weaker than seen on average since the jobs rebound began in mid-2013.

Meanwhile, construction companies reported a reasonably upbeat assessment for their growth prospects in 2017. Around half of the survey panel (48%) anticipate a rise in business activity during the next 12 months, while only 13% forecast a reduction. The degree of business confidence edged up to a three-month high during December, with a number of construction firms citing optimism that strong order books would help alleviate Brexit-related turbulence in 2017.

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