Housebuilding and commercial work lead output growth but rising prices sends warning signal

The recovery in UK construction output gained further momentum during June, according to the latest IHS Markit/CIPS UK Construction PMI Total Activity Index (PMI) data. Overall construction activity expanded at the fastest pace since June 1997, supported by another sharp rise in new orders. However the supply chain came under increasing pressure as prices jumped and product availability weakened.

At 66.3 in June, up from 64.2 in May, the seasonally adjusted PMI signalled the strongest rate of output growth for exactly 24 years. Sharp increases in business activity were seen across all three main areas of the construction sector monitored by the survey.

Construction companies overwhelmingly cited stock shortages among vendors, reflecting severe delays with shipping and haulage, especially for products sourced from the EU. In terms of building materials, panel members commented on short supply across the board, particularly cement, concrete, plaster, steel, timber and roof tiles. Imbalanced demand and supply resulted in rapid cost inflation

Tim Moore, Economics Director at IHS Markit, which compiles the survey, said:  “June data signalled another rapid increase in UK construction output as housing, commercial and civil engineering activity all expanded at a brisk pace.

“The headline index signalled the fastest rise in business activity across the construction sector for 24 years. Total new orders expanded at one of the strongest rates since the summer of 2007, mostly reflecting robust demand for residential projects and a boost to commercial work from the reopening UK economy.

“Purchasing prices and sub-contractor charges both increased at a survey-record pace in June, fuelled by supply shortages across the construction sector. Escalating cost pressures and concerns about labour availability appear to have constrained business optimism at some building firms. The degree of positive sentiment towards the year- ahead growth outlook remained high, but eased to its lowest since the start of 2021.”

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said: “A wave of new orders overwhelmed supply chains again this month where stock levels could not keep up with building work accelerating at the fastest rate since June 1997.

“The meagre availability of raw materials placed obstacles in the path of stronger workflows where supplier delivery times extended into record-breaking territory once again and surpassed the height of disruption when the pandemic first hit.

“A lack of delivery drivers and logistics difficulties for EU imports left stock undelivered or unavailable and construction companies waited while costs mounted. Construction’s heavy load remains inflation rising to its highest rate since April 1997 as a staggering 86% of respondents reported paying more for their goods in June.

“These malfunctions in supply chain performance may be a global issue but this doesn’t help UK builders who are ready but unable to return fully to projects which was reflected in the lowest optimism since January. This surge in activity will lose momentum while labour availability along with key materials remain elusive.”

Construction companies remain optimistic about growth prospects for the next 12 months. That said, the degree of confidence eased to its lowest since January, in part reflecting concerns about labour availability and the sustainability of the recent surge in demand.