Output continues to grow but construction optimism falls to 17 month low

The latest S&P Global / CIPS UK Construction Purchasing Managers’ Index (PMI) for March has found that a sustained rise in new work has boosted construction output, with commercial order leading expansion. However, escalating inflation, supply chain issues and war in Europe see business optimism fell to a 17-month low.

The headline PMI, which measures month-on-month changes in total industry activity, registered 59.1 in March, unchanged from February and well above the 50.0 mark that separates expansion from contraction. The latest reading signalled the joint-fastest rate of output growth since June 2021.

Tim Moore, Economics Director at S&P Global, which compiles the survey said: “Commercial projects helped keep construction growth at its highest level since last summer as clients boosted spending in response to the rollback of pandemic restrictions. Civil engineering also fared well in March as work on major infrastructure contracts underpinned growth. Residential work found itself in the slow lane, however, as some firms noted that greater caution crept into spending decisions.

“The construction recovery looks set to continue in the near-term as order books improved at the fastest pace for seven months in March. Input buying and job creation in the sector also remained indicative of strong underlying momentum.

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said: “A heartening result in March overall where new order levels were the highest since August last year, but not all the sub-sectors offered an equal contribution to output this month.

“The crippling rise in inflation ramped up again as transport and raw materials went up in price. Longer wait times for deliveries were reported by a third of supply chain managers. Construction companies are braced for more disruption on the horizon as a result of the Ukraine conflict. The rise in purchasing demand fed into higher costs for materials already in short supply as energy hikes also impacted business costs.

“With these severe challenges, it is no surprise that business optimism for the months ahead has been affected and fell to levels last seen in October 2020. The sector is facing several roadblocks as levels of job creation were also held back with the ongoing skills shortage and lack of builders.”

Concerns about the war in Ukraine, forecasts of severe cost inflation and a less favourable global economic outlook all weighed on constructors’ confidence in March. Around 48% of the survey panel expect a rise in business activity during the year ahead, while only 15% predict a decline. However, the balance of positive sentiment was the weakest seen since October 2020.

Gareth Belsham, director of the national property consultancy and surveyors Naismiths, commented: “Demand remains strong, and new orders have now been in positive territory for 22 months in a row. In fact, March saw new orders increase at their fastest rate since last August, and builders remain busy across the board – even if housebuilders find themselves in the unfamiliar position of being the slowest growing sector of the industry.

“That said, British builders are braced for a serious shock to their supply chain. At the start of the year, Russia and Ukraine together constituted the second-largest steel exporter in the world. With imports from Russia now blocked and Ukrainian production all but halted, UK steel prices are surging.”