The shoppers survey shows that UK construction output fell in July 2022 for the very first time in 18 months. Civil engineering activity has plummeted and only the commercial sector saw any growth last month.
Despite a decrease in output, order intakes remain strong, fuelling jobs growth as construction companies sought to improve capacity. There’s been continued improvement in the overall option of materials, making supplier delays minimal widespread since February 2020.
The headline seasonally adjusted S&P Global / CIPS UK Construction Purchasing Managers Index (PMI) which measures month-on-month changes altogether industry activity posted 48.9 in July, down from 52.6 in June. This is the very first time since January 2021 that the index has been below the main element 50.0 mark, the threshold between growth and contraction. Although only marginal, the rate of decline was the fastest since May 2020.
Civil engineering was the worst-performing segment in July (index at 40.1), with business activity falling to the best extent since October 2020. House-building declined for the next month running, however the rate of contraction was only slight (index at 49.4). Commercial work bucked the downturn, scoring a modest 52.3 in July, indicating that growth here was the weakest for 18 months. Survey respondents commented on headwinds to client demand from rising inflation, fragile consumer confidence and higher interest levels.
July data indicated a standard rise in new orders for the 26th consecutive month. But Julys upturn in home based business was notably weaker than seen normally in the initial 1 / 2 of 2022. Consequently, some construction companies cited too little new contracts to displace completed projects.
Employment numbers expanded at an accelerated pace in July and there have been again many studies of difficulties filling vacancies and strong wage pressures.
Construction firms noted upward pressure on business expenses from higher energy, fuel and transport costs, but this is partly offset by some easing in commodity prices, specifically for metals and timber.
Around 22% of the survey panel reported longer lead times from suppliers in July, while 7% signalled a noticable difference. Although still pointing to a standard downturn in vendor performance, the most recent survey indicated that supplier delays were minimal widespread since February 2020. Anecdotal evidence suggested that imported items remained the largest section of concern, especially those from China and mainland Europe.
A gradual turnaround in supply conditions and hopes of softer price pressures ahead meant that construction firms tempered their stock building efforts in July. Because of this, purchasing activity expanded at the weakest pace since January 2021. Where higher degrees of input buying were reported, this mostly reflected new project starts and hopes of rising business activity in the months ahead.
Business optimism remained subdued over the construction sector in July, with growth expectations well below those observed in the opening months of 2022. Having said that, the amount of positive sentiment found slightly from June’s 23-month low. Around 42% of the survey panel anticipate a growth in output through the coming year, while only 15% forecast a decline. Recession concerns, the price of living crisis and lower degrees of consumer confidence were probably the most commonly cited factors affecting business expectations in July.
Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey, said: “July data illustrated that cost of living pressures, higher interest levels and increasing recession risks for the united kingdom economy are going for a toll on construction activity. Total industry output fell for the very first time because the start of 2021 as civil engineering joined house building in contraction territory. Only the commercial segment registered growth in July, supported by strong pipelines of work from the reopening of hospitality, leisure and offices.
“More positively, input cost inflation has retreated from the peak seen this spring as lower commodity prices and offer improvements gradually filter to buyers of construction products and materials. The most recent round of price inflation was minimal marked for 16 months, despite sustained pressure from escalating energy costs and staff wages, while supplier delays were minimal widespread because the pandemic began.
“Expectations for output growth within the next 12 months are much less exuberant than those seen in the last 2 yrs, amid concerns that elevated inflation and higher borrowing costs will constrain demand. Nonetheless, the amount of construction sector optimism found slightly since June, which ended a five-month amount of falling confidence.”
Duncan Brock, director of the Chartered Institute of Procurement & Supply, said: “After almost a year of difficult conditions for builders, these challenges have finally led to a contraction in construction with the largest fall in activity since May 2020.
“This disappointing result was felt across all of the sectors, including housing which had demonstrated more resilience during the last year or two, but fell for the next month in a row in July. However, it had been civil engineering that fell the hardest and furthest. With fewer new orders planned, it might be a while before we visit a rebound in this sector considering enough time lag of infrastructure projects.
“Builders optimism remained at the cheapest levels seen for just two years. Job creation was healthy to perform work at hand however the danger remains which should the united kingdom economy turn unfavourable, this can affect job hiring and the development of key skills. A feather-like fall in prices may ease a few of the pain as usage of recycleables also improved, but prices at historically high levels will continue steadily to hamper activity in 2023.”
Gareth Belsham, director of surveyors Naismiths, commented: Up to now its a retreat rather than rout, but its hard to sugarcoat these disappointing figures. Ebbing confidence and months of gradually slowing momentum have finally tipped the construction sector into contraction territory for the very first time because the lockdown affected days of January 2021.
The pain is spread unevenly over the industry though, with infrastructure firms seeing the largest fall in output. Housebuilding contracted only slightly, and commercial building increased. The flow of new work is slowing too, with many firms reporting that degrees of new orders are significantly down on which they saw earlier this season.
Having said that, todays report isnt without very good news. The formerly runaway inflation in building material costs has slowed as prices ease for a few key commodities such as for example metals and timber, and building firms continue steadily to hire more staff. Looking ahead, rising interest levels can make some developers reassess their plans and can eventually cool demand from house buyers too.
These concerns have combined to create builders a lot more downbeat concerning the future than these were in the beginning of 2022, even though sentiment improved slightly in July after hitting a 23-month lower in June. No-one is breaking out the finish is nigh sandwich boards yet, however the growth days are over for the present time and the is digging set for a hardcore second 1 / 2 of the entire year.
Toby Banfield, financial restructuring partner at accountancy firm PwC, said: Julys results continue steadily to follow the downward trajectory of the index on the first 1 / 2 of the entire year. Smaller, privately owned contractors typically increased their financial leverage through the pandemic. However, with cash now very tight because of amount of rising interest levels, high material prices and increasing labour inflation, these lenders are feeling the impact of the existing economic environment.
We have been discovering that our clients over the supply chain are most concerned about how smaller, privately owned contractors will be in a position to manage through the existing trading environment. Because of these circumstances, we have been seeing suppliers reducing credit terms wanted to contractors, which might be reflected in the low degrees of stock building reported in the July figures.
Max Jones, director in Lloyds Banks infrastructure and construction team, said: As the data show a stronger-than-anticipated dip in output, there’s still resilience and a feeling of positivity among many contractors within the.
Larger firms hold strong balance sheets which are helping them to navigate rising interest levels and inflation, even though that is less so for smaller businesses, they’re in a comparatively healthy position, and will leverage capital management and cashflow tools to bolster that further when needed.
A solid pipeline of public sector work means contractors can still plan with some confidence. However, they’ll also be conscious that under a fresh Prime Minister, government spending priorities could change in relation to infrastructure projects such as for example roads, hospitals, and schools. Whatever that decision is, clarity at the initial opportunity will undoubtedly be what the sector wants; doubt helps nobody.
Rising material and labour costs, and liabilities for historical cladding projects, are major worries for contractors, yet insolvencies over the sector have remained low, which indicates a resilient sector and something that’s performing relatively well.
Mark Robinson, leader of public sector procurement agency Scape, said: July represents peak season for the construction sector, so a decline in industry activity undoubtedly serves as cause for concern. Looking ahead, its clear that the duty of filling order books is now more difficult, with input costs continuing to improve and developers reviewing their plans or even putting them on hold.
Many contractors will undoubtedly be looking to the results of the Tory leadership race for a steer on future fiscal conditions particularly with regards to public spending as community-focused investment continues to prove a catalyst for local growth. For the time being, contractors will have to work diligently with clients to make sure projects continue steadily to progress promptly also to budget.
Fraser Johns, finance director of regional contractor Bear, said: The biggest fall in construction activity since February 2020 confirms the view that another 18 months may very well be slower for the sector. However, addititionally there is some market correction occurring because the pent-up demand following pandemic begins to subside. That is probably why commercial work which bucked the downward trend – is expanding at its weakest pace for 18 months.
The decrease in supplier delays is encouraging, the continued delays on some imported items from China and Europe remain a problem.
Skills shortages continue being an issue for the sector. Recruitment of staff is really a challenge for several industries. We have been spending so much time to attract a diverse and inclusive workforce by offering incentives and opportunities for development at all levels, from apprenticeships to senior managers.
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