Commercial contracts lead return to growth for construction buyers

Purchasing managers indicated a return to growth in February for the UK construction sector after lockdown had caused it to contract in January for the first time since last May.

Commercial contracts lead return to growth for construction buyers

The latest IHS Markit/CIPS UK Construction Total Activity Index improved to 53.3 in February after weakening to an eight-month low of 49.2 in January from 54.6 in December and 54.7 in November. February’s improvement was led by a pick-up in activity in the commercial sector. Housebuilding kept growing at a decent pace but was at a nine-month low. Civil engineering work contracted for a third month but at a reduced rate.

Most elements of the construction survey were improved in February. New business growth picked up appreciably after a significant slowdown in January while employment rose modestly. Confidence in future output was the highest since October 2015.

A concern for construction companies was that input costs rose at the fastest rate for more than 12 years due to stretched global supply chains, greater shipping charges and rising commodity prices.

The construction PMI completes a set of improved purchasing managers’ surveys for February. While they are still limited overall, the services, manufacturing and construction surveys suggest activity has come off its January lows and eases some concern about the potential size of contraction in the UK economy in Q1. Nevertheless, it still appears that the UK is being much more affected by lockdown and restrictions in Q1 2021 than it was in Q4 2020. 

Tim Moore, economics director at IHS Markit, said: “Construction work regained its position as the fastest-growing major category of UK private sector output in February.

“The rebound was supported by the largest rise in commercial development activity since last September as the successful vaccine rollout spurred contract awards on projects that had been delayed at an earlier stage of the pandemic.

“Civil engineering activity has been somewhat subdued in recent months, but survey respondents continued to cite the positive outlook for infrastructure work on major transport projects as a factor helping to boost confidence in the construction sector.

“Stretched supply chains and sharply rising transport costs were the main areas of concern for construction companies in February.

“Reports of delivery delays remain more widespread than at any time in the 20 years prior to the pandemic, reflecting a mixture of strong global demand for raw materials and shortages of international shipping availability.

“Subsequently, an imbalance of demand and supply contributed to the fastest increase in purchasing costs across the construction sector since August 2008.”

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: “On the one hand, February saw a welcome rise in overall output in the construction sector as commercial projects in particular were woken from their slumber and purchasing levels rose across the board for the ninth month in a row.

“On the other hand, strong demand for products added pressure to already impaired supply chains as sellers battled with raw material shortages, and the costs of business rose at the fastest rate since August 2008.

“Though delivery times were still deteriorating as port disruptions made their mark, it was to a lesser degree compared to January suggesting the worst of the squeeze due to Brexit may have eased.

“Supply chain managers found themselves spinning a number of plates with creative ways to get stock including sourcing more local supply for some.

“These ongoing issues did nothing to dampen builder enthusiasm as optimism for the future rose to its highest since October 2015 and this return to confidence lead to job hiring at the fastest rate for almost two years.

“With part-time furlough options now in place, some constructors will be mixing and matching their approaches to meet the ebb and flow of projects and capacity in the coming months.”

Gareth Belsham, director of the national property consultancy and surveyors Naismiths, commented: “January’s wobble is starting to look like little more than a New Year’s Day hangover.

“The construction industry clicked straight back into gear in February, posting a solid jump in output. More exciting still, the pace of new orders accelerated even further.

“New order numbers have now increased for nine months in a row, buoyed by rising investor confidence.

“With construction firms steadily starting to recruit again, the industry is clearly responding to the Prime Minister’s call for Britain to ‘build, build, build’ its way back to economic growth.

“There are a few wrinkles in the data but little to worry busy builders. The pace of housebuilding eased off a touch, but residential is still the strongest subsector in the construction industry. And after months of fragility, commercial sector building is finally picking up steam too.

“The flipside of all this is a surge in materials prices. With demand exceeding supply and transport costs nudging up as oil prices rise, cost pressures are starting to build sharply.

“The Chancellor’s ‘steady as she goes’ Budget struck the right tone with a construction industry which is feeling increasingly upbeat about its future. Optimism is now at its highest level since October 2015, and while there is nothing inevitable about the momentum, it is real and improving.”

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