Civil engineering rose at its highest level since 2009 in March, according to a leading global index which measures the monthly construction output of the UK economy.
At 50.7 in March, 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 down from 54.6 in February but above the 50.0 no-change threshold for the second month running.
A rise in new orders pushed confidence higher in March, with civil engineering experiencing the fastest rise in business activity, while house building was the weakest-performing area.
Lower volumes of residential building work have now been recorded for four months in a row although across UK construction projects supply conditions improved, reflecting greater availability of construction products and materials, alongside fewer logistics bottlenecks.
The overall improvement in performance was the strongest since November 2009, S&P’s index noted.
Boost for construction from HS2
Survey respondents again cited a boost from work on HS2 infrastructure projects and robust demand for other transport-related construction activity.
Last month it was claimed delays linking up HS2 and Euston will mean extra costs and potentially even higher spending.
The National Audit Office warned ministers in a near 50-page report, looking specifically at the Euston element of the much delayed high-speed line, that a “reset” in 2020 had “not succeeded”.
It said that latest estimate by HS2 Ltd set the cost for the 10-year platform design at Euston at near £5 billion, over £2 billion over-budget.
The latest PMI construction survey also signalled an increase in commercial building work (index at 51.1), although the rate of expansion eased from February’s nine-month high.
Meanwhile, housing activity (index at 44.2) decreased at a sharp and accelerated pace in March. The rate of decline was the fastest since May 2020, with those in the industry often citing fewer tender opportunities due to rising borrowing costs and a subsequent slowdown in new house building projects.
The latest rise was the second fastest since July 2022 and the index also found that greater workloads led to a solid upturn in staff recruitment, with the rate of job creation accelerating to its fastest since last October.
Some construction firms said that elevated wage pressures and shortages of available candidates had acted as a constraint on hiring.
Purchasing activity was unchanged in March, suggesting that improved supply conditions had encouraged them to run down inventories.
No chance of recession?
March’s index also appeared to show the fastest improvement in suppliers’ delivery times for more than 13 years.
Around 46 per cent of the survey panel predict an increase in business activity during the year ahead, while only 11 per cent foresee a reduction. The resulting index reading signalled the strongest degree of positive sentiment since February
Optimism has rebounded strongly from the two-and-a-half year low seen in December, largely reflecting signs of a turnaround in client spending and a more favourable outlook for the wider UK economy.
Tim Moore, economics director at S&P Global Market Intelligence, said: “Improved tender opportunities were also reflected in an upturn in new orders since February and the strongest rate of job creation for five months,” he added.
Dr John Glen, chief economist at the Chartered Institute of Procurement & Supply, added: “Strong inflationary pressures remained an obstacle to wider expansion at building companies however along with concerns over consumer affordability rates. With residential building still struggling and falling at the fastest rate since May 2020,.
“A small uplift in construction activity in March shows the sector is heading in the right direction and at a stabilising pace, and with a few uplifting surprises along the way.”
More investment in construction needed
Max Jones, director in Lloyds Bank’s infrastructure and construction team, said that despite a dip in the reading, contractors were heading into the spring months with cautious optimism.
“Industry leaders have naturally expressed disappointment about recent HS2 announcements and the impact on the sector’s pipeline, however, infrastructure continues to provide a healthy orderbook.
“With wages and materials inflation steadying from last year’s highs, contractors are re-focussing on investing in their ESG responsibilities. We’re increasingly speaking to businesses looking to improve their sustainability and diversity performance – this will be driven by larger players initially but should lead to wider change across the industry.”
Joe Sullivan, partner at MHA, said the government needed to do more to upskill workers and encourage more housebuilding.
“The fall in average house prices was expected given consumers are feeling the strains from inflation and higher interest rates. Whilst medium term mortgage deals are priced under the current base rate of 4.25%, the recent increase will further stymy affordability and demand. Most house builders will produce fewer units in 2023, so the growth in the sector will need to come from commercial and civil engineering.
“The Spring Budget may not have shocked the sector but did little to inspire or help the housing or commercial markets over the long term. Contractors still engage with fixed price or even loss-making contracts, prioritising short-term cash inflow and team retention over medium-term profitability and working capital funding. Management teams need to be open minded about renegotiating contract terms and retain a forensic understanding of which overhead elements can be reduced swiftly to avoid future financial distress.
“Similarly, shortage of labour is now the single biggest headache for the sector. Vacancies in the sector have risen at a faster rate than across the economy as a whole, illustrating the need for the government to provide help quickly. Adding construction roles to the Shortage Occupation List is a welcome move, but this measure is only interim and won’t be implemented until the Summer, bringing into question its effectiveness. The policy may also not deliver similar rates across the country, as traditionally the South East and London have benefitted most from migrant labour.
“It is clear stakeholders are moving towards improving recruitment and retention, this is too little and too slow. The sector must promote itself as an appealing industry for school leavers and graduates to have a sustained future.”