A slowdown in housebuilding drags down construction output

A slowdown in housebuilding drags down construction output

The latest IHS Markit/CIPS Construction PMI signalled that the construction sector’s main driver of growth in recent months, housebuilding, slipped into decline, ending a 16-month expansion.

UK construction companies reported a subdued start to 2018, with total industry activity barely rising.

A return to contraction in residential building activity was accompanied by near-stagnant commercial and civil engineering activity. New orders declined, linked by many companies to market uncertainty.

“The construction PMI delivered meagre results for January as any hopes for a stellar start to the year were eclipsed by a surprisingly poor show from the housing sector, offering its worst performance since July 2016,” said Duncan Brock, Director of Customer Relationships at the Chartered Institute of Procurement & Supply.

On a more positive note, confidence towards future growth prospects improved, with many firms anticipating an increase in new project wins later in the year.

Sam Teague, Economist at IHS Markit and author of the IHS Markit/CIPS Construction PMI said, “Survey respondents reported increased hesitance among clients to invest in new projects amid heightened concerns over the UK economic outlook. Encouragingly, however, firms generally expect things to improve later in the year.

“Constructors’ optimism towards future growth prospects reached a seven-month high. Many forecasted that the soft patch in construction demand would be short-lived and new project wins would pick up throughout the year, though this will inevitably depend on how Brexit negotiations play out. Despite the upturn, optimism remains worryingly low by historical standards.”

Meanwhile, intense cost pressures continued across the UK construction sector. The seasonally adjusted IHS Markit/CIPS UK Construction Purchasing Managers’ Index® (PMI® ) posted 50.2 in January, down from 52.2 in December. The figure was just above the neutral 50.0 no-change mark, thereby signalling a fractional rate of growth that was the weakest for four months.

The rate of job creation eased to an 18-month low in line with the reduced growth of building activity. Whilst some firms hired additional staff in anticipation of future new project wins, others reported job shedding in response to lower workloads. New orders received by UK construction companies decreased slightly for the first time in four months during the latest survey period.

Many respondents linked falling new business to worries fuelled by general political and economic uncertainty. Despite softening marginally since December, cost pressures remained intense in January. Inflation in input costs was driven by a variety of materials such as bricks, copper and timber.

Brendan Sharkey, head of construction and real estate at MHA MacIntyre Hudson, said, “Uncertainty about the financials of major companies means private and public purchasers will hold off placing big orders.

“For every firm like Balfour Beatty, which has made public all relevant financial information, others have not disclosed their exposure to the effects of Carillion’s demise and the turnover before profit culture. This lack of clarity can only serve to dampen growth in the sector.

Sub-contractor usage increased during January, thereby ending a ten-month sequence of decline. Furthermore, the latest expansion was the strongest seen since November 2016. In response, subcontractor availability fell sharply. Despite subdued total industry activity growth and falling new orders, optimism among UK construction companies improved in January. Many firms anticipate a pick-up in new business wins later in the year.

“With construction teetering on the edge of contraction, this surprise outcome will serve as a jolt to policymakers, that the impact of political and economic uncertainty remains large at the beginning of 2018,” said Brock.

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