Infrastructure leads construction growth in February

Richard Furlong - City Surveys Group

Home » Infrastructure leads construction growth in February

Published: 21st March 2017

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

  


Despite early predictions that construction work would be driven down by the 12% plunge in the pound since last year’s Brexit referendum vote, it has continued to grow at a steady pace, with civil engineering taking the lead from house-building in February.

The latest monthly survey of construction purchasing managers shows construction bucking the trend with continued expansion across the industry, despite commercial building experiencing a decline in activity for the first time since October 2016.

The Markit/CIPS monthly Construction Purchasing Managers’ Index (PMI) survey showed increased civil engineering activity, growth in construction sector employment and a busy quarter for house-building (albeit at the slowest rate for 6 months) to be positive indicators for the current state of construction in the UK.

It was thought that if intense cost inflation persisted through February, inextricably linked to higher prices for imported materials, it would place overwhelming pressure on the construction industry. However, it appears the industry has come prepared.

“For listed contractors, the reporting season revealed that firms are in generally good health,” said Max Jones, global corporate relationship director for construction at Lloyds Bank.

“In this sense, the years since the recession – with more focused strategies, increasingly disciplined approaches to contract bidding and improving margins – appear to be paying off.”

As a result, February saw marginal growth in the seasonally-adjusted Markit/CIPS PMI, up to 52.5 from 52.2 in January 2017.

Whilst positive, it is significantly subdued in comparison to the rapidly upward trend of the past three and a half years. As mentioned above, it is the likely result of sharply rising input costs having an adverse impact on contract completions.   

Contractors and subcontractors alike have seen demand increase, leading to the sharpest drop in subcontractor availability since January 2016.

Elsewhere, sustained pressure on supplier capacity led to the sharpest deterioration in vendor performance since June 2015, with suppliers unable to meet the demand having a knock-on effect on the end user.

Tim Moore, author of the survey and senior economist for Markit, said: “February’s survey data highlights that the UK construction sector has rebounded from its post-referendum soft patch but remains on a relatively slow growth trajectory.

“Weaker momentum in the house building sector was a key factor weighing on construction growth, alongside a renewed fall in work commercial projects.

“There was little sign that the UK storms had a material impact on construction growth in February, although some firms noted that longer delivery times for roof tiles had added to supply chain issues. Instead, survey respondents mainly cited an underlying slowdown in sales growth, with the latest rise in new work the weakest for four months. In some cases, construction companies reported that sharply rising input prices had a disruptive impact on contract negotiations.”

Economists are encouraged by the Q1 results and have forecast continued growth for the PMI as 2017 progresses. They have, however, warned about a possible drop in the rate of expansion if supply and demand problems persist.

Paul Hollingsworth, economist at Capital Economics, predicts a marginal increase for the PMI – to 55.5 – this year, taking it past the 54.5 reading in December 2016.

He said: “[The survey] is likely to show that the sector has held up relatively well in the first quarter, adding to other evidence suggesting that the economy as a whole has maintained a decent amount of momentum.”

Not all analysts share Hollingsworth’s optimism, however.

Samuel Tombs, economist at Pantheon, cautioned: “With Brexit uncertainty likely to continue to weigh on business confidence and falling real wages set to worsen housing affordability, it remains hard to see the construction sector’s malaise coming to an end this year.”

Overall, respondents to the survey (made up of purchasing managers from 170 UK construction companies) remain positive about growth prospects for the next 12 months with 48% predicting a rise in business activity compared to just 13% expecting a decline.

The reasons for this? Continued strong demand for residential house-building countrywide along with gradual stabilisation and growing confidence in the economy as a whole as our departure from Europe begins.


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