Output highest for five months but optimism at 29-month low, PMI reveals

Construction activity continues to rise in October, but new orders fall for first time since May 2020.

Construction growth edged up to its highest for five months, but business optimism dropped to a 29-month low, according to the latest monthly PMI figures revealed today.

October PMI® data indicated that the UK construction sector gained momentum, with total industry activity rising at the fastest pace since May.

Despite signalling a solid recovery in business activity from the downturn seen this summer, construction companies indicated that growth expectations for the year ahead remained very subdued. The degree of optimism fell sharply since September and was the lowest for almost two-and-a-half years, reflecting falling volumes of new work and worries about the longer-term UK economic outlook.

The headline seasonally adjusted S&P Global / CIPS UK Construction Purchasing Managers’ Index® (PMI®) – which measures month-on-month changes in total industry activity – posted 53.2 in October, up from 52.3 in September and the highest reading since May. Moreover, the index continued to pick up from the 26-month low seen in July (48.9). Higher levels of business activity were attributed to a combination of new project starts and strong pipelines of unfinished work.

Commercial building was the best-performing category in October (index at 54.5), with output growth reaching a five month high. Residential work also expanded (51.2), but at a softer pace than in September. Meanwhile, civil engineering activity decreased for the fourth month running (48.5).

Total new orders decreased slightly in October, which ended a 28-month period of sustained expansion. Construction companies noted weaker confidence among clients, alongside headwinds from rising input prices and higher borrowing costs. Some firms also reported a drop in new work due to heightened political uncertainty.

Rising construction output contributed to increases in input buying and staff hiring during October. However, survey respondents noted that weaker demand contributed to a slowdown in the rate of job creation since September.

There were some positive signals for supply chain performance in October as instances of longer delivery times were the fewest since February 2020. Moreover, the seasonally adjusted Suppliers' Delivery Times Index was above its pre-pandemic average, which suggested that supply shortages and transport delays have eased considerably in comparison to the low point seen last year.

Despite a turnaround in supply chain pressures, latest data signalled another steep increase in average cost burdens across the construction sector. Higher purchasing prices were overwhelmingly linked to greater energy costs, fuel bills and the pass through of rising wages. This was partly offset by softer commodity price pressures. Measured overall, the rate of input cost inflation eased slightly since September and was the lowest for 20 months.

Looking ahead, construction firms are relatively downbeat about their growth projections for the year ahead. Around 33% of the survey panel anticipate a rise in business activity, while 26% predict a decline. The resulting index signalled the lowest degree of optimism since May 2020.

Many companies commented on recession worries and a drop in UK economic prospects due to rising political uncertainty. Meanwhile, those reporting positive sentiment in October often cited tender opportunities in niche markets or opportunities related to infrastructure spending (especially green energy projects).

Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey said: "Construction output has staged a modest recovery after the downturn seen through much of this summer, with growth hitting a five-month high in October.

"However, the forward-looking survey indicators highlight that growth will be harder to achieve in the coming months as rising borrowing costs, economic uncertainty and cost constraints all had a negative influence on order books in October.

"Business optimism regarding the year ahead slumped in October and was by far the weakest since the early pandemic months. Construction firms cited concerns about a broad-based decline in client demand due to cutbacks on non-essential spending among clients, although some noted that growth linked to green energy projects, planned infrastructure spending and success in niche markets could help to offset the UK economic headwinds."

Dr John Glen, chief economist at the Chartered Institute of Procurement & Supply, said: "The UK is entering a recession and higher borrowing costs are intensifying these challenges, which combined to drag down builder optimism about the year ahead to its lowest level since May 2020."

Stephen Marcos Jones, CEO of the Association for Consultancy and Engineering (ACE) said: “This week’s gloomy outlook from the Bank of England will not do much to boost business confidence – it’s clear that the challenging times are here to stay, although there is some good news now expected around inflation next year.

“Eyes will now be turning to the new chancellor’s autumn statement on 17 November. We’ve seen some rumours of reviews around some major infrastructure projects – it is crucial that government holds firm on previously agreed plans.

“Our industry needs confidence and certainty in the pipeline if it is to deliver the medium to long-term growth that will deliver the jobs and growth that will help to pull us out of recession.”

Mark Robinson, group chief executive at public sector procurement specialist SCAPE, also said that firms will be watching the chancellor’s autumn statement closely, as they look for measures that will improve their outlook for the next 12 months.

He said: “Growth in the construction sector continues to fly in the face of wider market conditions, including a particularly unsettled October for the economy.

“Looking ahead, firms will have one eye on the upcoming autumn statement and its impact on the public purse – which often supports development activity during economic downturns. With public spending likely to be reduced, it is vital that local authorities are efficient in their efforts to secure central funding to support local regeneration, boost social value and stimulate the economy more broadly.”

PMI data was collected between 12-28 October 2022.

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