Fastest rise in construction output since October 2015

July’s construction output saw fastest rise since October 2015, but concerns remain on economy and employment, PMI figures reveal.

UK construction output in July saw the fastest rise since October 2015, but significant concerns around the economy, employment and future work pipelines still remain high, according to the latest PMI survey results.  

The bellweather IHS Markit/CIPS UK survey found that UK construction companies signalled a sharp and accelerated expansion of business activity during July, led by another strong increase in house building. 

New orders also picked up for the second month running, with survey respondents commenting on a boost to sales from easing lockdown measures and the restart of work on site. 

However, the speed of recovery was insufficient to prevent additional cuts to employment numbers across the construction sector and the rate of job shedding was faster than in June.

At 58.1 in July, up from 55.3 in June, the headline seasonally adjusted IHS Markit/CIPS UK Construction Total Activity Index registered above the 50.0 no change threshold for the second consecutive month.

Commercial work and civil engineering activity both expanded at slightly quicker rates than in June. Growth was often attributed to the catch up of work that had been delayed during the Covid-19 pandemic.

July data also indicated the fastest rise in new orders since February, although the rate of expansion remained softer than that recorded for output levels. There were reports that clients remained apprehensive about committing to new projects, resulting in intense competition to secure sales and squeezed margins.

Construction firms are optimistic overall about the prospect of a recovery in business activity during the next 12 months. Around 43% of the survey panel expect a rise in output over this period, while only 30% forecast a fall. However, confidence moderated since June, which was linked to concerns about the economic outlook and a lack of new work to replace completed projects.

Worries about the speed of recovery contributed to a sustained decline in staffing numbers during July. The latest data signalled a sharp rate of job shedding, with around one-in-three survey respondents (34%) reporting a fall in employment.

Meanwhile, input cost inflation reached its highest level since May 2019. Pressure on costs was partly linked to stretched supply chains, as signalled by another steep lengthening of average lead times among vendors in July.

Tim Moore, economics director at IHS Markit, which compiles the survey, said: "Survey respondents noted a boost to sales from easing lockdown measures across the UK economy and reduced anxiety about starting new projects. However, new work was still relatively thin on the ground, especially outside of residential work, with order book growth much weaker than the rebound in construction output volumes.”

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: "After a summer of this blistering return to growth, building companies should prepare for a chilly autumn as furlough schemes come to an end and the real strength of the UK economy is revealed. Making up for lost time is one thing, but sustainable real growth is what the sector needs otherwise this recovery is just building on soft sand."

Mark Robinson, chief executive of public sector procurement specialist Scape Group, said: “The construction industry has already stepped up in getting sites back open and operating at somewhere near full tilt this summer. However, these latest figures mask the point that the long-term picture will remain unclear until the pre-Covid cycle of projects come to completion and we see how many spades go in the ground on new developments.”

Max Jones, relationship director in Lloyds Bank Commercial Banking’s infrastructure and construction team, said: “Optimism is high among contractors and those we speak to are reporting that activity is picking up. The end of the chancellor’s furlough scheme in October is a key milestone as it’s difficult to gauge the impact it will have on the industry’s workforce. Some contractors will inevitably choose to make redundancies if they feel their pipelines are too weak. More broadly, there’s a wait-and-see element here.”

Ragene Raithatha, senior associate in the construction & infrastructure practice at DWF, said: “Looking ahead, the sector should prepare for a few difficulties as furlough schemes come to an end. In a post–pandemic world, there will still be a requirement for more homes, urban regeneration, improved infrastructure, improved offices, retail space and more distribution facilities. We all know from past downturns that a robust construction sector will emerge but how and when, we just do not know."

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