UK construction firms have reported a deceleration in the industry’s growth in July, signalling weaker development in terms of housing activity and a reduction in the commercial sector, according to the latest IHS Markit/CIPS (Chartered Institute of Procurement & Supply) UK survey.
There is a reduction in new business capacity growth for the first time since August last year when Brexit issued a blow that “acted as a headwind to job creation and input buying across the construction sector”.
With construction material prices on the increase and supply chains under considerable pressure, rates have fallen sharply in 2017, showing some of the worst figures since 2011. The UK’s Construction Products Association also noted a slowing down of growth prospects for the industry as the country prepares to leave the EU.
On issuing its latest forecast, the CPA blamed diminished output expectations on a fall in wages and cost increases which would have an adverse effect on the industry as a whole. The most recent projections indicate that 2018 may see only a 0.7% rise which is a severe drop on previous predictions indicated a 1.2% increase. This represents the slowest rise in six years.
Seasonal influences have also contributed to a downturn in the IHS Markit/CIPS UK Construction Purchasing Managers’ Index (PMI), from 54.8 in June to 51.9 in July, showing the worst performance in this sector since August 2016. The latest figures reveal a rather restrained rate of activity growth in the business arena with a long-run average of just 54.5.
A key factor restraining overall business activity growth is the drop in levels of commercial construction which, while not overwhelming, are more rapid than at any other point in the past 12 months. The IHS Markit/CIPS survey suggested that respondents are battling with delays caused by clients unwilling to make decisions in this era of economic concerns and vagaries concerning the current political status.
Although the residential building sector experienced its slowest rise in the past three months, it remains the strongest area of activity for the month of June, with civil engineering also displaying an improvement in terms of output growth.
From an industry point of view, clients seemed unwilling to commit to new projects in July and, as demand deteriorated, so volumes of new business declined with it – the first time the industry has seen a slump of this nature since the uncertainties resulting from the Brexit referendum last year.
Lower sales have caused UK building companies to tighten their belts when it comes to purchasing, according to July’s PMI data and the upturn evident in input buying proves negligible, as well as being the least robust since March.
The author of the IHS Markit/CIPS Construction PMI, Tim Moore, said, “July data reveals a growth slowdown in the UK construction sector, mainly driven by lower volumes of commercial development and a loss of momentum for house building.”
“Weaker contributions from the cyclically sensitive areas of construction activity more than offset resilience in the civil engineering sector.”
In keeping with previous assertions, Mr Moore said certain key factors were responsible for the reduced demand, namely concerns for the economic future of the country and its political solidity. Clients are unwilling to invest in new projects and are extending decision-making periods prior to commitment.
“The combination of weaker order books and sharply rising construction costs gives concern that an extended soft patch for the construction sector may be on the horizon,” he added.
Similarly, director of customer relationships at CIPS, Duncan Brock said the weaker Pound continues to increase price pressures, “driving cost inflation near to a six-year peak, stifling purchasing activity and jobs growth.”
Although the growth prospects for 2018 are looking dubious following the recent downgrade, the CPA reported that on-site activity is still high and expected to increase throughout the year with a rise of 1.6%. This has been favourable revised from previous forecasts which suggested just 1.3% increase.
This sharp rise has been stimulated by the new contracts and activity surrounding the Grenfell Tower fire which occurred in London in June. An estimated £6.9 billion (€7.62 billion) is being funnelled into the repair of public housing as well as maintenance and improvements to deal with the resulting damages.
The CPA predicts that growth over the next couple of years will be spearheaded by developments in infrastructure and private housing which, it is hoped, will offset the decline in other sectors, such as commercial and industrial.
With major rail, water and sewerage projects on the agenda, the growth in infrastructure is set to benefit with a 7.4% growth in 2017 and 6.4% in 2018. This is largely due to projects such as the HS2 high-speed railway and the Thames Tideway Super Sewer in London. The CPA forecasts no longer include the works at Hinkley Point C power station, due to continued delays.
In cause and effect cycle, the industry’s growth is dependent on developments with private house-building which, in turn, is relying heavily on the government’s Help to Buy equity loans to increase demand. The government policy is designed to support the demand for new housing and help drive development in this sector until 2021 with a predicted growth of 3.0% in 2017 and 2.0% in 2018. The CPA is unimpressed, indicating that this is a slow rate of growth and reflects consumer hesitancy and reductions in real earnings.