Business activity gained speed across the UK construction sector, but widespread supply shortages persist, according to the latest data.
October data indicated that business activity gained momentum across the UK construction sector, but growth remained much softer than the 24-year high seen in June. Construction companies continued to report widespread supply constraints and rapidly increasing purchase prices – issues which Advantage wrote about in the summer – although these trends were the least severe since April.
House building overtakes commercial work
The headline seasonally adjusted IHS Markit/CIPS UK Construction PMI® Total Activity Index registered 54.6 in October, up from 52.6 in September, to signal a robust and accelerated rise in output volumes. This index has now posted above the crucial 50.0 no-change value in each of the past nine months and hit a peak of 66.3 in June.
House building (index at 55.4) replaced commercial work (55.2) as the best-performing category of construction work in October. The latest increase in residential work was the strongest for three months. Commercial construction also expanded at a quicker pace than in September, with survey respondents citing a sustained boost from looser pandemic restrictions. Meanwhile, civil engineering activity (51.4) increased only marginally in October.
Strong customer demand, accompanied by supply shortages
New order growth was unchanged from September’s eight month low and much weaker than seen on average during the summer. Construction companies mostly commented on strong customer demand, but some suggested that supply shortages and escalating costs had hindered contract negotiations.
Resilient pipelines of new work were highlighted by a steep increase in purchasing activity across the construction sector in October. The latest expansion was the fastest for three months and often reflected pre-purchasing ahead of new project starts. Employment numbers also increased at a sharp and accelerated pace in October. Advantage has previously noted that construction vacancies hit an all time high in that month.
Most expect an increase in output over the next year
More than half of the survey panel (54%) reported longer delivery times among suppliers in October, while only 2% saw an improvement. Delays were overwhelmingly linked to haulage driver shortages and international shipping congestion. However, the number of construction firms reporting longer wait times for supplier deliveries was down from 63% in September and a peak of 77% in June.
Mirroring the trend for supplier delays, latest data signalled another steep rise in input costs, but the rate of inflation slipped to a six-month low. Around 73% of the survey panel reported an increase in purchase prices in October, which was attributed to rising energy and commodity prices as well as raw material shortages and a lack of transport availability.
Finally, the near-term outlook for construction growth remained positive in October. Just over half (52%) forecast an increase in output during the year ahead, while only 8% expect a decline. The degree of optimism improved slightly since September, despite some firms citing concerns about the impact of supply shortages and sharply rising costs.
‘The worst phase of the supply crunch may have passed’
Tim Moore, Director at IHS Markit, which compiles the survey said:
“UK construction companies achieved a faster expansion of output volumes in October, despite headwinds from severe supply constraints and escalating costs. House building showed the most resilience, as signalled by the fastest rise in residential work for three months.
“However, the volatile price and supply environment added to business uncertainty and continued to impede contract negotiations. As a result, the overall rate of new order growth was unchanged from the eight-month low seen in September.
“There were widespread reports that shortages of materials and staff had disrupted work on site, while rising fuel and energy prices added to pressure on costs. Nonetheless, the worst phase of the supply crunch may have passed, as the number of construction firms citing supplier delays fell to 54% in October, down from 63% in September. Similarly, reports of rising purchasing costs continued to recede from the record highs seen this summer.”
‘Rising optimism and employment levels’
Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said:
“Activity in the construction sector powered ahead in October with the fastest rise in purchasing for three months as builders continued their summer bounce into the autumn and resorted to forward buying and building stock levels.
“New order growth remained constant but increasing lead times from suppliers made commitment to contracted projects difficult because of the unpredictability of materials arriving on time as reported by over half of all supply chain managers. A slight moderation in input price inflation also gave hope to builders that price rises were receding, which could mean fewer delayed projects as costs were reviewed.
“With rising optimism and employment levels builders seem confident that the next 12 months will be rosier. However, with the squeeze on supply and staff shortages, it’s far from guaranteed that uncertainty and instability are behind us just yet.”
Advantage’s view: This is not the first time Advantage has written about the challenges that strong demand accompanied by supply and staff shortages are posing for the construction sector. However, what’s different this month is that although demand has remained steady, the latest data seems to suggest that supply constraints may be easing somewhat. And as construction firms have started to fill new vacancies, even a slight easing of the pressure over recruitment and supply chain issues will, of course, be met with relief. The hope now will be that Tim Moore is right when he suggests that “the worst phase of the supply crunch may have passed.” If he is, the sector will be well placed to build upon its post-lockdown growth.
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