Confidence in UK construction market

Richard Furlong - City Surveys Group

Home » Confidence in UK construction market

Published: 9th January 2017

This Article was Written by: Richard Furlong - City Surveys Group


In an industry survey released this month, contractors have shown confidence in the UK construction market with an 11-month high for new order growth, somewhat relieving the uncertainty surrounding Brexit.

One conclusion from the latest monthly survey of Construction Purchasing Managers is that, despite rising costs from suppliers (the steepest rise for just over five-and-a-half years) contractors are optimistic that strong order books will help relieve Brexit-related turbulence over the next 12 months.

However, many respondents to the Markit and Chartered Institute of Procurement & Supply survey stated ‘Brexit hasn’t actually happened yet’ indicating that an industry backlash could still be on the horizon.

Paul Trigg, Construction Specialist and Assistant Head of Risk Underwriting for Euler Hermes, pointed out: “Business confidence across construction remains high. But the industry is yet to feel the full brunt of Brexit and there are concerns the current work pipeline will only carry contractors in the short-term.”

“Residential and civil engineering should remain buoyant heading into 2017, but we expect the fall in GDP growth to hit commercial property hardest. Plummeting levels of foreign direct investment are expected to curb office development, which will hurt contractors as competition ramps up and squeezes low industry margins even further.

“Pressure on cashflow will inevitably impact companies’ ability to pay on time across the supply chain and construction businesses will need to be extra careful when managing their credit books.”

Meanwhile, the increase in demand throughout December points to a positive end to the year for construction, with the fastest rise in new order volumes in over 11 months resulting in sustained job creation and an upturn in business.

Although greater workloads have led to the fastest increase in solid employment since May it was still much weaker, on average, than was seen since the jobs rebound began in mid-2013.

The December adjustment to the Construction Purchasing Managers’ Index (PMI) indicated a rise reaching 54.2, up from 52.8 the previous month, suggesting accelerated expansion in overall construction output.

Having sat at the no-change mark for the past four months the December PMI signals the fastest pace of expansion since March 2016.

Most growth was seen in housing expansion activity, civil engineering projects and commercial construction, with residential building activity still at the top as the best performing sub-category of 2016.

Tim Moore, Senior Economist for Markit, said: “December’s survey data confirmed a solid rebound in UK construction output during the final quarter of 2016. All three main areas of construction activity have started to recover from last summer’s soft patch, but in each case growth remains much weaker than the cyclical peaks seen in 2014.”

New business volumes showed a sustained recovery from earlier in the year, with survey responses citing rising client demand and a resilient economic backdrop as the main causes.

Moore continued: “The main negative development in December was a sustained acceleration in input cost inflation to its strongest since 2011. UK construction companies noted that the weaker sterling exchange rate had resulted in higher costs for a wide range of imported materials, while some also reported that forward purchasing of inputs had led to depleted stocks among suppliers.”

The latest increase in supplier costs was the fastest in 68 months according to the survey and came alongside lengthening supplier lead-times and the most marked deterioration in vendor performance since June 2015.

Undeterred, 48 percent of those surveyed anticipate growth for their prospects in 2017, while only 13 percent expect a reduction – a fairly optimistic assessment and the highest since October.

David Noble, Chief Executive of the Chartered Institute of Procurement & Supply, said in summary: “Strong pipelines of new work were reported across all sub-sectors, and construction firms showed improved confidence after the impacts of uncertainty around the EU referendum.

“With these more resilient economic conditions, the sector also reported the fastest pace of job creation since May 2016, as companies developed their workforces to meet new projects.

“In the short-term at least, the sector looks set to enjoy these improved demand conditions for the coming months, which is positive news after many months of instability.”

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