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Construction growth rebounds to 17-month high in May, driven by house building

Friday, June 02, 2017


Key findings:

  • Business activity rises at fastest pace since December 2015
  • Residential work replaces civil engineering as best performing category
  • Input cost inflation moderates to seven-month low


IHS Markit/CIPS UK Construction PMI®

UK construction companies experienced a sharp rebound in business activity during May, helped by the fastest upturn in residential work since the end of 2015. The latest survey also revealed a sustained recovery in new work, following the soft patch seen during the first quarter of 2017. Increased workloads encouraged greater staff recruitment and a marked expansion of input buying across the construction sector. Meanwhile, prices for imported materials continued to push up input costs during May. However, the overall rate of input price inflation eased further from the peak seen at the start of the year.

The seasonally adjusted IHS Markit/CIPS UK Construction Purchasing Managers’ Index® (PMI® ) posted 56.0 in May, up sharply from 53.1 in April, to signal the strongest expansion of overall business activity for 17 months. While the headline index signalled robust growth momentum during May, the latest reading was still much weaker than the post-crisis peak seen in January 2014 (64.6).

A sharp and accelerated rise in residential work was a key factor supporting overall construction activity in May. The housing sub-category has rebounded strongly following the seven-month low seen in March. Moreover, the latest increase in residential building was the fastest since December 2015. Survey respondents cited a strong pipeline of new development projects and resilient underlying demand conditions.

May data also pointed to solid rises in civil engineering and commercial building. Although commercial development remained the weakest performing sub-category, the latest rise in activity was the fastest since March 2016.

New business intakes picked up in May, with the rate of expansion the fastest seen so far in 2017. Reports from survey respondents mainly cited resilient demand from the housing sector. Despite the improvement in new work, construction firms noted that heightened economic uncertainty continued to act as a brake on client spending.

Increased workloads underpinned a further marked rise in employment numbers across the construction sector in May. The rate of job creation accelerated for the second month running to its strongest since January 2016. Mirroring the trend for staff recruitment, latest data showed that input buying expanded at the steepest pace for 16 months in May.

A rebound in demand for construction materials placed pressure on supply chains in May, with delivery times lengthening to the greatest extent since March 2015. However, the were more positive developments in terms of cost inflation, as overall input prices rose at the slowest pace for seven months. Survey respondents reported that the weak exchange rate had led to intense negotiations with suppliers, but some noted that the peak phase of price hikes for imported materials had now passed.

Comments:

Duncan Brock, Director of Customer Relationships at the Chartered Institute of Procurement & Supply, said:

“After years of sluggish house building, the construction sector has snapped back into action in May. Construction growth has surged to a 17 month high as the uncertainty caused by the EU referendum appears to be abating.

“The unexpected recovery in construction has been felt most acutely in residential housing as builders finally feel able to respond to demand for new homes. The sector had been held back by the rising cost of raw materials but after months of tense negotiations with suppliers, input prices are starting to stabilise.

“The rapid upturn in production is putting considerable pressure on construction supply chains. Suppliers are struggling to meet demand while there is a growing shortage of contractors to complete work. After the experience of the financial crisis, it may be some time before risk aversion fully recedes and suppliers have more confidence to invest in their capacity. Only time will tell whether we are witnessing a long awaited resurgence in housebuilding.”

Tim Moore, Senior Economist at IHS Markit and author of the Markit/CIPS Construction PMI® , said:

“May’s survey data reveals that the UK construction sector has started to recover strongly from its slow start to 2017.

“House building was the key growth driver, with work on residential projects rising at the fastest pace since December 2015. A sustained rebound in residential building provides an encouraging sign that the recent a soft patch for property values has not deterred new housing supply. Instead, strong labour market conditions, resilient demand and ultra-low mortgage rates appear to have helped boost work on residential development projects in May.

“Civil engineering continued to flourish, helped by a strong pipeline of infrastructure projects. However, commercial building was trapped in the slow lane amid reports highlighting that heightened economic uncertainty is holding back client spending.

“The forward-looking elements of the latest survey are reassuring for the construction sector, notably the acceleration in new business growth to its strongest so far this year.

“On the price front, while construction costs have ratcheted up over the past six to nine months, the wave of inflation from imported materials now appears to have passed its peak.”

For industry comments, please call: 

CIPS

Trudy Salandiak

Tel: +44 1780 761576 / +44 7554 400731

Email: trudy.salandiak@cips.org