Construction output falters for first time in 18 months

A lack of work has driven the first squeeze in the construction sector’s output for a year and a half.

Less work in the residential and civil engineering sectors saw a downturn in July, according to the Purchasing Managers’ Index (PMI). The decline suffered by both sectors “more than offset” an increase in work in the commercial sector.

The index, compiled by IHS Markit and the Chartered Institute of Procurement & Supply (CIPS), measures construction output across commercial, civils and residential sectors. Each sector is given a score: above 50 indicates that activity is expanding and below 50 suggests it is slowing.

Overall, the index registered a score of 48.9 in July, down from 52.6 in June. It is the first time the sector has seen its output shrink since January 2021.

Civil engineering’s output came in at 40.1, which was its worst performance since October 2020, while housebuilding’s output was 49.4. Output in the commercial sector also dropped to its lowest score for 18 months.

Growing inflation reportedly hit clients’ widespread desire to start new projects, while “fragile consumer confidence” and higher interest rates also played their part in the decrease.

Scape chief executive Mark Robinson said the fall in industry activity was “undoubtedly” a cause for concern, with the sector traditionally enjoying a peak of activity in July.

“Looking ahead, it’s clear that the task of filling order books is becoming more challenging, with input costs continuing to increase and developers reviewing their plans, if not putting them on hold,” he added.

Robinson argued that the outcome of the Conservative leadership race would be a key moment in determining future economic conditions, especially focusing on public spending.

The sector is also battling a faltering increase in new orders, which could see a lack of work to replace completed projects in the months ahead.

Despite the decrease in work, easing pressures over material availability meant supplier delays were at their lowest since the coronavirus pandemic began. Around a fifth of respondents reported longer lead times in July.

Business optimism, meanwhile, remains low across the sector, with 42 per cent of respondents expecting a rise in output. That is far lower than the proportion seen at the beginning of the year – something that can be attributed to concerns over an incoming recession, the cost-of-living crisis and lower levels of consumer confidence.

MHA head of construction and real estate Brendan Sharkey said demand for housing in particular will “inevitably decline” in the coming months due to the cost-of-living crisis.

“Today’s expected interest rate rise, which could see the base rate increase by 50 basis points, alongside increased travel costs, general inflation and reduced employment, will also prompt many consumers to put their needs for a new house on the back burner,” he added.

But Lloyds Bank infrastructure and construction team leader Max Jones said there is still “resilience and a sense of positivity” within many contractors across the industry.

“Larger firms hold strong balance sheets that are helping them to navigate rising interest rates and inflation, and while this is less so for smaller businesses, they are in a relatively healthy position, and can leverage capital management and cashflow tools to bolster that further when needed,” he added.

He warned that “doubt helps nobody” and said contractors would be on the lookout for any changes in spending priorities under the new prime minister.

Leave a comment