UK CONSTRUCTION companies signalled a further increase in output volumes during August, however the pace of growth eased notably from the previous survey period.
There were softer expansions across housebuilding, commercial work and civil engineering activity as well as in new order growth.
Moreover, companies widely noted sustained, and severe, supply chain disruption in August, which contributed to an accelerated rise in input prices, and one that was the second sharpest in the history of the survey.
The headline seasonally adjusted IHS Markit/CIPS UK Construction PMI® Total Activity Index posted 55.2 in August, down from 58.7 in July, indicating activity has expanded in each of the last seven months. That said, the rate of increase eased to the softest since February as restricted supply of materials and transport began to weigh on overall construction activity.
Commercial work (index at 56.0) was the best performing broad category of construction output in August, though the rate of expansion eased to the slowest for six months.
This was followed closely by housebuilding (55.0), while civil engineering remained the slowest growing subsector (54.8) for the fourth month in a row.
Total new work increased for the fifteenth consecutive month in August. While the latest improvement in order books was marked overall, the rate of growth softened to the weakest since March. Businesses noted a continued resumption of projects that had been delayed due to Brexit and the COVID-19 pandemic, though client confidence was dampened by volatility in raw material supplies and increased cost burdens.
Jobs and Skills
Amid softer growth in new orders, the rate of job creation eased to a four-month low in the latest survey period. Firms continued to note that strong market conditions had sustained demand for new employees, though additional cost burdens and a lack of skilled workers began to weigh on the rate of hiring.
Input buying expanded at the slowest pace since January.
Materials and Costs
Strong rises in demand for construction materials continued to stretch supply chains however, as some firms noted difficulty in sourcing and receiving purchased inputs. This occurred as supplier delivery times continued to lengthen at a substantial rate, though one that was slightly improved from June’s record deterioration. Anecdotal evidence suggested that ongoing material shortages were exacerbated by a lack of transport and freight availability, compounding existing issues related to the supply of materials due to port congestions and
Demand and supply Imbalances
As a result, input cost inflation accelerated to the second fastest rate in the 24-year history of the survey, surpassed only by the record rise two months prior. Among those materials reported as up in price, the most common were concrete, fuel steel and timber.
Looking ahead, construction companies remained highly upbeat about their growth prospects over the coming 12 months. Positive sentiment was underpinned by hopes of an expected rise in new contract awards across all subsectors of construction.
Usamah Bhatti, Economist at IHS Markit, which compiles the survey said:
“Evidence that the UK construction sector began to feel the impact of ongoing supply chain disruption was widespread midway through the third quarter of 2021. Growth rates for overall activity as well as the three monitored subsectors eased further from the recent highs earlier in the summer.
Similarly, new business inflows have continued to increase at a marked pace, yet even here the rate of growth has eased to a five-month low.
“Supply chain disruption continued to disrupt activity across the UK construction sector, as demand for materials
and logistics capacity outstripped supply. Average vendor performance continued to deteriorate at a near-survey record rate, as firms noted severe shortages of building materials, a lack of available transport capacity and long wait times for items from abroad due to port congestion.
“As a result, the rate of input cost inflation faced by construction companies accelerated to the second-fastest
on record, while the increase in subcontractor rates hit a fresh series high, fuelled by supply shortfalls in the sector.
Despite this, businesses noted a stronger degree of optimism regarding the year-ahead outlook, as more than half of survey respondents predicted a rise in activity. This was underpinned by expectations that new contracts would be brought to tender across the construction sector as markets continued to recover from the economic disruption caused by the pandemic.”
Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said: “Formidable supply chain pressures restrained purchasing activity and building projects across the board in August as 68% of construction companies reported even longer delivery times for materials compared to July. A combination of
ongoing covid restrictions, Brexit delays and shipping hold-ups were responsible as builders were unable to complete some of the pipelines of work knocking on their door.
“Material and staff costs went through the roof as job hiring accelerated to fill the gaps in capacity left behind by employee moves, overseas worker availability and brought on by skills shortages. Paying higher wages for experienced staff along with low stocks of materials at suppliers meant inflationary pressure rose at a rate almost on a par with June’s survey record. 84% of supply chain managers reported paying more for their purchases.
“These obstacles to construction’s progress are set to continue and are now affecting last year’s strongest performer – house building, which will exacerbate the problem of housing supply. However optimism improved on last month as more than half of building firms believe that output will continue to rise in the year ahead.”
Joe Sullivan, partner at MHA, says: “Output growth in the construction sector was slightly dampened again in August, a consequence of tightening supplies and the traditional holiday season, rather than flagging demand.
“Constrained labour and material supply issues are starting to have a greater negative impact in the sector. Quite simply, it is taking longer to complete contracts and becoming more expensive to do so. The industry is not alone in being affected by well-reported driver shortages, which are compounding the material shortage. We expect supplies will become even more strained as the lag associated with annual European factory shutdowns, for holiday and maintenance, impacts the sector as we move into the autumn.
“Contractors need to understand their contractual obligations, and proactively manage orders and the expectations of all stakeholders throughout their activity chain, something which may prove increasingly difficult in future months.
“Further ahead increased inflation will erode budgets and potentially weaken demand. It feels like conditions are set fair for greater turbulence before the year turns. Only time will tell if the Bank of England will soften in its attitude towards an increase in the Base Rate, adding further potential uncertainty. However, for now, significant demand on both commercial and residential fronts remains as a key solace.”
Victim of Its Own Success
Gareth Belsham, director of the national property consultancy and surveyors Naismiths, commented:
“The construction industry is fast becoming a victim of its own success. The supply chain problems are no longer just project speed bumps; they’re applying the brakes to new orders as well.
“Soaring prices of key building materials, not to mention patchy availability and lengthy delays, have forced some construction firms to admit to clients that they simply cannot keep up with demand for building projects.
“With steel, timber and fuel costs all mushrooming, contractors are seeing their margins eaten away. The pipeline of new work is still healthy by historical standards, but orders are now coming in at the slowest rate since March.
“But despite a growing sense that the post-lockdown boom may have peaked, the mood in the industry remains overwhelmingly upbeat. More than half of the builders surveyed for the PMI predict a further increase in activity over the coming year.
“Cool heads in the industry have seen this all before, and experienced developers and builders are recalibrating prices and schedules and getting on with it.
“But there is still the nagging question about the painfully high levels of material cost inflation; is it a blip, or will it start to impact not just the delivery of projects, but demand as well?” construction activity
Joshua Raymond, director at financial brokerage XTB added:
“The UK Construction PMI for August disappointed, coming in lower than forecast at 55.2. The main takeaway here is that the expected slowdown in growth was faster than initially thought and this is something we need to watch in the coming months after a jump in construction in Q2.
“It’s clear a key driver behind this slowdown is a shortage of supply in building supplies and materials, which severely impacted completions. This, aligned with issues at the border in moving materials and workers across countries has created a perfect storm for construction.
“With a sharp increase in inflation looming, the situation doesn’t look like it will get any easier for firms.”
Demand Outstripping Supply
Brian Berry, Chief Executive of the Federation of Master Builders, said:
“Builders throughout the UK, particularly smaller firms, are struggling to recover from the pandemic as a result of the continued materials crisis. For some time now, demand for building materials has been outstripping supply, with this month’s data representing the second-fastest rate for input cost inflation since recording began.
“The FMB’s latest membership survey revealed the prevalence of this crisis within the sector, with 98% of FMB members experiencing price increases for building materials. It’s vital that transparent allocation and pricing policies are implemented to help enable SMEs to have continued and stable access to materials. The Government should also re-evaluate their position with regard to issuing temporary visas for EU HGV drivers, to better enable the delivery of materials.”
“Notwithstanding the wider economic impact risked by consumers choosing not to undertake building projects as a result of delays, there is also a real risk that the current environment is exploitable by cowboy builders. Builders are working hard to stick to agreed timelines, but consumers must be cautious about promises to complete jobs quickly and cheaply. All too often these will be too good to be true, and could well leave households at the mercy of unscrupulous cowboy builders.”