Construction activity rises at softest pace since February

August PMI finds Covid and Brexit combination driving labour and material shortages and record inflation, but industry remains upbeat.

UK construction output rose at the softest pace since February but, despite the combined effects of the pandemic and Brexit causing labour and material shortages to drive inflation, the industry remains highly upbeat about growth prospects over the coming 12 months.

The bell-weather monthly PMI figures for August found UK construction companies signalled a further increase in output volumes during August, however the pace of growth eased notably from the previous survey period. There were softer expansions across housebuilding, commercial work and civil engineering activity as well as in new order growth.

Moreover, companies widely noted sustained, and severe, supply chain disruption in August, which contributed to an accelerated rise in input prices, and one that was the second sharpest in the history of the survey.

The headline seasonally adjusted IHS Markit/CIPS UK Construction PMI® Total Activity Index posted 55.2 in August, down from 58.7 in July, indicating activity has expanded in each of the last seven months. That said, the rate of increase eased to the softest since February as restricted supply of materials and transport began to weigh on overall construction activity.

Commercial work (index at 56.0) was the best performing broad category of construction output in August, though the rate of expansion eased to the slowest for six months. This was followed closely by housebuilding (55.0), while civil engineering remained the slowest growing subsector (54.8)  for the fourth month in a row.

Total new work increased for the fifteenth consecutive month in August. While the latest improvement in order books was marked overall, the rate of growth softened to the weakest since March. Businesses noted a continued resumption of projects that had been delayed due to Brexit and the Covid-19 pandemic, though client confidence was dampened by volatility in raw material supplies and increased cost burdens.

Amid softer growth in new orders, the rate of job creation eased to a four-month low in the latest survey period. Firms continued to note that strong market conditions had sustained demand for new employees, though additional cost burdens and a lack of skilled workers began to weigh on the rate of hiring.

Input buying expanded at the slowest pace since January. Strong rises in demand for construction materials continued to stretch supply chains however, as some firms noted difficulty in sourcing and receiving purchased inputs. This occurred as supplier delivery times continued to lengthen at a substantial rate, though one that was slightly improved from June's record deterioration. Anecdotal evidence suggested that ongoing material shortages were exacerbated by a lack of transport and freight availability, compounding existing issues related to the supply of materials due to port congestions and demand and supply imbalances.

As a result, input cost inflation accelerated to the second-fastest rate in the 24-year history of the survey, surpassed only by the record rise two months prior. Among those materials reported as up in price, the most common were concrete, fuel steel and timber.

Looking ahead, construction companies remained highly upbeat about their growth prospects over the coming 12 months. Positive sentiment was underpinned by hopes of an expected rise in new contract awards across all subsectors of construction.

Usamah Bhatti, economist at IHS Markit, which compiles the survey said: "Supply chain disruption continued to disrupt activity across the UK construction sector, as demand for materials and logistics capacity outstripped supply. Despite this, businesses noted a stronger degree of optimism regarding the year-ahead outlook, as more than half of survey respondents predicted a rise in activity. This was underpinned by expectations that new contracts would be brought to tender across the construction sector as markets continued to recover from the economic disruption caused by the pandemic."

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: "Formidable supply chain pressures restrained purchasing activity and building projects across the board in August as 68% of construction companies reported even longer delivery times for materials compared to July. A combination of ongoing Covid restrictions, Brexit delays and shipping hold-ups were responsible as builders were unable to complete some of the pipelines of work knocking on their door. However optimism improved on last month as more than half of building firms believe that output will continue to rise in the year ahead."

Jan Crosby, head of infrastructure, building and construction at KPMG UK, said: “A perfect storm continues to hamper availability of materials and labour across the sector in the UK. The industry is telling us that this is one of their biggest concerns right now, and that supply chain delays are preventing them from taking on new work to grow their construction businesses at a time when the economy is bouncing back.

“The good news is that demand remains high across most markets, particularly residential and infrastructure. This month has again seen slow growth for the sector. The ongoing lorry driver shortages and lack of stock mean these supply vs demand worries aren’t going away quickly.”

Max Jones, director in Lloyds Bank’s infrastructure and construction team, said a picture is now emerging of those best-placed to thrive post pandemic and those that will struggle, yet labour and materials shortages remain a real worry across the board.

“With results season in full swing a picture is emerging of the contractors best-placed to take advantage of the post-pandemic recovery. Those with strong balance sheets are in a more robust position when bidding for contracts and can secure better margins as a result, putting them in better shape for future growth,” said Jones.

“Yet threats to contractors’ confidence come in the form of the twin worries of labour and materials shortages. While the former is more peripheral for now, supply issues mean those with deeper pockets are buying up materials months in advance, leaving less for the rest of the industry for the here and now. Many builders are now eyeing up contracts outside their usual areas of focus, often on public sector schemes. These are proving to be a good filler of order books with healthy margins and some contractors are coming together to mitigate risk and share their talent pools on certain projects.”

Mark Robinson, group chief executive at public sector procurement specialists SCAPE, said that although output growth is promising, the harsh reality of material and labour shortages is a pressing matter and called for greater industry collaboration to help “build back better.”

“Continued output growth in August is testament to the resilience of contractors across the supply chain and their commitment to driving the ongoing economic recovery,” said Robinson. “However, across the country, the harsh reality of materials and labour shortages is threatening to derail the speed at which projects can be delivered.

“The construction industry has never been afraid to tackle challenges head on and managing the short-term risk caused by inflation must remain the priority if we are to stay true to the ‘build back better’ mantra. To do this, greater collaboration between clients, contractors and their supply chains is vital to help alleviate any mid-project issues that might arise and ensure that an accountable and healthy environment is created from outset. This also includes holding large contractors to fair payment practices to boost cashflow for SMEs and lessen the pressure on smaller suppliers.”

Fraser Johns, finance director at regional contractor Beard, said: “Today’s stats really underline the concerns expressed at the start of the year that the supply chain issues would undermine the post-pandemic recovery in construction. With the slowest level of growth in five months and now client confidence dampening as a result of the uncertainty over supplies, it feels a long way from the wave of optimism felt at the end of 2020 and into Q1 this year.

“It puts real emphasis once again on relations with supply chains – ensuring prompt payment for example - and requires a proactive approach in terms of multi-stage procurement and working more closely with customers to keep them well informed about the situation. We don’t look to be turning a corner any time soon on the supply crisis, so it’s key for the industry to pull together and collaborate right through the supply chain to try to lessen the impact of these issues.”

August PMI data was collected between 12-27 August 2021.

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