The August construction PMI data shows that whilst supply chain pressures are easing, overall construction activity is continuing to slow down and stagnate under the influence of economic uncertainty
August construction PMI data has shown that new order growth has slowed to weakest since June 2020, amid widespread economic turbulence and anticipated inflation.
The headline seasonally adjusted S&P Global / CIPS UK Construction Purchasing Managers’ Index® (PMI®) – which measures month-on-month changes in total industry activity – was at 49.2 in August, up fractionally from 48.9 in July but still below the 50.0 no-change mark and thus signalling a reduction in construction activity over the month. Activity has now decreased in two consecutive months.
Supply chain issues softened by falling buying activity and inflationary pressures beginning to ease
Construction firms slowed down input buying for the first time since the initial wave of the pandemic, reflecting signs of a slowdown.
Shortages of certain materials are still in play, but as price pressures ease there is less of a need to build inventories and supply is not as compounded. As a result, vendor lead times in August lengthened to the least extent in two and a half years.
Fuel prices remain high and this kept input costs high, but the rate of inflation softened to the weakest since February 2021.
Commercial activity and civil engineering both declined in output in line with economic uncertainty
The August Construction PMI data indicated that commercial activity and civil engineering both declined in output, the former ending a year and a half-long period of growth, whereas the latter saw a more severe drop over the last month.
Housing projects however, increased marginally for the first time in three months- to the least extent since June 2020. Respondents indicated that this was due to customer hesitance on committing to new orders amid cost pressures. Parallel to this, business confidence also dropped in July and was well below the series average.
In some cases, concerns around the wider economic environment impacted hiring decisions. Although rising new orders, the clearing of backlogged work and the filling of previously vacant positions kept employment rising solidly, the rate of job creation eased to the softest since March 2021.
As well as scaling back purchasing and overall slowing the rate of job creation, construction firms kept their usage of subcontractors unchanged in August. This ended an 18-month sequence of expansion.
Meanwhile, the rate of subcontractor availability continued to fall sharply, and to the largest degree in six months.
Industry thoughts on the August construction PMIs
Fraser Johns, Beard finance director, said: “Economic uncertainty both in the UK and abroad is clearly having an impact on confidence which is starting to affect the construction market.
“The positives in the data are that new orders continue to increase, if marginally, and a number of construction firms are still reporting increasing activity with a rise in the number of new orders still coming in.
“Demand for both new employees and subcontractors remains strong, while the availability of both fell sharply. This supports the importance for contractors to treat subcontractors fairly and pay them promptly, something the industry has significantly improved on in recent times.
“All firms are impacted by the continued rise in costs, and looking ahead, given the sheer scale of these cost rises we have seen, we are likely to see a softening of demand. As always strong relationships and open conversations between all stakeholders will go a long way to the industry working through the challenges we face.”
Dr John Glen, chief economist at the Chartered Institute of Procurement & Supply, said: “The UK construction sector is poised for contraction once again as rising prices for raw materials worldwide filtered into UK supply chains. Just 14 months since the sector’s recent peak as part of the recovery from the pandemic, inflation is seeing housing and commercial building stagnate with civil engineering activity dropping significantly.
“There is some consolation for the sector as it readies itself for a future of high energy costs, however. Lower demand is leading to fewer purchases, downward pressure on input costs and more responsive supply chains. Together, these trends could eventually help to reverse inflation, but a prolonged dip in new orders will be a bitter pill for the sector to swallow.”
A challenging period ahead for the UK construction sector
Andrew Harker, Economics director at S&P Global Market Intelligence, which compiles the survey said: “The UK construction sector looks set to be in for a challenging period, according to the latest PMI data. Not only did construction activity fall for the second month running, but a range of indicators from the survey pointed to further weakness ahead. New orders slowed to a crawl, while concerns about the sector and the wider economy led to a drop in confidence.
“Activity weakness was broad-based in August, with none of the three monitored categories immune to the wider slowdown. Commercial activity dropped into contraction for the first time in just over a year-and-a-half, and while housing activity ticked higher, the segment has been in broad stagnation over the past three months.
“Price and supply pressures showed further signs of easing as waning demand throughout the sector lifted pressure on suppliers. Meanwhile, the main positive from the latest survey was a solid increase in employment. That said, hiring at least in part reflects an ongoing catch-up following the pandemic. If activity continues to fall, firms will likely soon feel that their staffing capacity is sufficient and pause hiring.”
Stephen Marcos Jones, CEO of the Association for Consultancy and Engineering (ACE) responded:
“The headline from the survey results is that construction is entering a period of significant challenge. Now the election process has been concluded, the new prime minister and her cabinet need to make up for lost time and provide support for businesses on energy as soon as possible. While not affecting the fundamental weaknesses demonstrated in these figures, it will go some way to easing concerns and boosting business confidence at a critical moment for the sector.”
