Slowest rise in construction output since February, latest PMI reveals

July’s PMI sees ‘perfect storm’ combining to slow down construction output after June’s 24-year high.

A ‘perfect storm’ of Brexit trading delays, global supply pressure and Covid has led to the slowest rise in construction output since February, latest monthly PMI figures have revealed.

July’s PMI data highlighted that the recovery in UK construction output lost momentum in all three main categories of work, with business activity growth easing from June’s 24-year high. 

Survey respondents often cited difficulties keeping pace with the recent surge in demand for construction projects, especially due to raw material supply shortages and shrinking sub-contractor availability.

With demand for construction materials continuing to outstrip supply, latest data signalled another steep increase in purchasing prices. Around 81% of the survey panel reported a rise in their average cost burdens during July, while only 1% signalled a decline.

The headline seasonally adjusted IHS Markit/CIPS UK Construction PMI Total Activity Index registered 58.7 in July, down sharply from June's 24-year high of 66.3 but still well above the crucial 50.0 no-change threshold. The latest reading signalled the slowest overall increase in construction output since February.

House building was the best-performing category in July (index at 60.3), followed closely by commercial building (59.2). In both cases, the rate of expansion was the weakest since February. This mostly reflected stretched business capacity and growth constraints due to supply issues, but some firms noted that the post-lockdown spike in customer demand had started to wane.

Civil engineering activity (55.0) followed the momentum seen elsewhere in the construction sector during July, with growth easing sharply since June and the lowest for five months.

Total order books continued to improve in July, but the latest rise in new work was the weakest since March. Similarly, input buying expanded at the slowest pace since April amid a softer recovery in demand. Construction companies also noted that reduced materials availability had acted as a brake on purchasing volumes in July.

Around 66% of the survey panel reported longer wait times for supplier deliveries in July, while only 2% signalled an improvement in vendor performance. The resulting index signalled widespread supply chain delays, although the latest reading was up from June's record low and the highest for three months. Survey respondents noted that supply imbalances were amplified by a lack of transport availability, port congestion, and Brexit trade frictions.

A rapid pace of input cost inflation continued in July, fuelled by supply shortages and robust demand for construction items. Higher charges among sub-contractors and difficulties filling staff vacancies also added to price pressures. The latest decline in sub-contractor availability was the second-fastest since the survey began in 1997, exceeded only by that seen during the lockdown in April 2020.

Finally, construction firms continued to hire staff at a strong pace, reflecting rising orders and confidence regarding the near-term outlook. While optimism toward future output growth remained historically high, the index drifted down to its lowest for six months in July. 

Tim Moore, economics director at IHS Markit, which compiles the survey, said: "July data marked the first real slowdown in the construction recovery since the lockdown at the start of this year. It was unsurprising that UK construction companies were unable to maintain output growth at the 24-year high seen in June, especially with widespread supply shortages and constrained capacity to take on additional orders.”

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: "The rampant rise in prices for raw materials and transportation continued to be the construction’s heavy load along with historically long delivery times. Faced with transport disruptions, shortages of essentials and Brexit delays, the initial spurt of activity this year is fast hitting the rocks. Building optimism was dampened to the lowest since January as it is difficult to foresee when all these challenges are likely to subside."

Matthew Farrow, director of policy at the Association for Consultancy and Engineering, said: “Despite the difficult circumstances the industry is collectively facing, overall trends are still positive. However, it is also clear that the ‘perfect storm’ of Brexit trading delays, global supply pressures, and Covid, is now severely impacting on construction in the UK. The industry needs to continue to work together, through forums like the Construction Leadership Council, if it is to lessen the impact of these structural issues in the coming months. This is the only way to avoid the stalling of strong post-pandemic growth.”

Mark Robinson, group chief executive at public sector procurement specialists SCAPE, said: “With the combined effect of the full reopening of the economy and the sector’s usual summer boom, it’s no surprise to see a trajectory of continued growth for the construction industry. However, whether this trend continues in the face of ongoing materials and labour shortages remains to be seen, as building in many major UK cities is now more expensive than in Paris, Berlin or Singapore.

“Collaboration is going to be crucial if we are to overcome the hurdles created by rising costs. Clients need to bring contractors on board earlier in the process to ensure that they’re on the same page about what’s possible for their project, and contractors have a responsibility to work closely with their supply chain, to mitigate the risk of shortages and price increases. These steps will help reduce any negative impacts on projects and retain much-needed delivery momentum.”

Jan Crosby, head of infrastructure, building and construction at KPMG UK, said: “The UK construction sector continues to chomp at the bit for new projects, but overall growth has slowed for the first time this year as builds are still being affected by the ongoing global supply chain problems, which in turn are causing significant delays in deliveries and price rises for materials.

“In addition, lorry driver shortages mean stock that does arrive here in the UK is often delayed further due to logistical setbacks, and on site construction slows down when workers need to self-isolate. Combined, this is creating a Catch-22, which could impact how well the sector recovers and grows over the coming months.”

Dave Sheridan, executive chairman at MMC housebuilder ilke Homes, said: “Increased material prices, backlogs in the supply chain and labour shortages, both of construction workers and HGV drivers, are putting significant pressures onto builders, developers and contractors. It is little wonder that this perfect storm of factors has led to the slowest rise in construction output since February, as both residential and commercial developments compete for both materials and labour to deliver projects on time.”

Chris Bone, CEO at digital construction company Modulous, highlighted the problems facing SME’s. He said:"The rising cost of essential construction materials continues to squeeze the pips out of SME homebuilders, while lagging output exposes weaknesses across industry supply chains.

“Competition is at an all-time low, as only a select few players can absorb the costs associated with the perfect storm of rocketing global demand, supply-side shortages, and higher shipping costs. It's clear that the industry as a whole is going to have to reduce wastage to mitigate costs, and review their procurement strategies as they compete with other industries which are experiencing similar issues.”

PMI data was collected between 12-29 July 2021.

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