Construction growth falls to a three-month low

Construction activity has been declining for five consecutive months now

The purchasing managers’ index for November, compiled by S&P Global, scored 50.4, putting it just marginally above 50.0 no growth. September and October had seen a modest return to growth after the negative territory of July and August, but it appears dangerously close to slipping back below 50 again.

A number of respondents noted that higher borrowing costs and concerns about the economic outlook had reduced construction activity.

Expectations of growth in business activity over the coming year continue to slide, with optimism now at its lowest level in two-and-a-half years, the survey found. Aside from the levels seen at the start of the pandemic, the level of positive sentiment was the weakest since December 2008.

Commercial work was the only segment to register an overall increase in business activity in November (index of 51.1). House building activity ground to a halt (index of 50.0), ending a three-month period of marginal expansion. Higher mortgage interest rates and declining consumer confidence were cited as factors holding back housing activity.

Construction activity (at 46.7) decreased for the fifth consecutive month. The latest reduction was the sharpest since August. Lower production volume was mainly linked to a lack of new work to replace completed projects.

Data from November pointed to a modest increase in total order intake across the construction sector, which contrasted with a slight decline in October. However, the increase in new business was much weaker than the average in the first half of 2022. Survey respondents often noted that weaker domestic economic conditions had acted as a headwind to customer spending.

Employment figures continued to rise in November, but the rate of job creation slowed to the lowest since February 2021. Construction companies suggested that concerns about rising costs and weaker growth had led to a more cautious hiring policy.

In contrast to the slowdown in employee recruitment, the latest data signaled the fastest increase in input purchases since July. Higher levels of purchasing activity were linked to increasing workloads and improved raw material availability, although some mentioned attempts to place orders ahead of supplier price increases.

Average cost burdens increased sharply in November, which was linked to rising energy prices, tight supply conditions and general inflationary pressure. However, overall input price growth slowed to the least marked since January 2021, partly due to softer commodity prices.

Looking ahead, some 29% of the survey panel expect an increase in business activity in 12 months, while 26% predict a decrease. This suggests the lowest level of confidence since May 2020.

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Tim Moore, chief financial officer at S&P Global Market Intelligence, which compiles the survey, said: “The halt in housebuilding activity contributed to the weakest performance in the UK construction sector for three months in November. Survey respondents noted that new residential construction projects had been reduced in response. to rising interest rates, canceled sales and worries about the economic outlook.

“Construction growth was largely confined to the commercial segment, but even here the rate of expansion has slowed considerably since October as customer confidence weakened in response to increased business uncertainty. At the same time, a lack of new work to replace completed projects resulted in another fall in civil engineering activity.

“The number of construction firms predicting an increase in overall business activity over the coming year exceeded those predicting a decline by only a very good margin during November. Additionally, we ignore a three-month period of negative sentiment at the start of pandemic, our survey measure of business expectations across the construction sector was the joint-weakest since December 2008.”

John Glen, chief economist at the Chartered Institute of Procurement & Supply, said: “The small increase in activity in November did little to dispel builders’ fears about the future, as optimism fell to levels seen in December 2008 during the last recession and to one of the the same lows seen during the pandemic.

“This gloomy outlook was driven in part by continued shortages of key materials such as steel and timber along with skilled labor, which affected hiring which increased at the slowest pace since February 2021. As new order growth remained below the 2022 average year to date, builders became hesitant to hire too many workers and there was some talk of job cuts due to fears about the strength of the economy in 2023.

“Overall, it was civil engineering that remained steadfastly stuck in the mud, with the fastest fall in activity since August. Customer hesitation, worries about material costs and doing business weighed heavily on the sector, which recorded its fifth consecutive monthly drop in activity. Residential construction also appears to to have run out as increased borrowing costs continue to dampen demand.

“Purchasing activity remained high as companies worried about higher costs and potential delays reportedly ordered more than they needed, and delivery times increased for the fourth month in a row. Construction firms now have a tightrope to walk in being ready for recovery and cautious about investment . until the way is clear for sustainable building opportunities going forward.”

Fraser Johns, finance director of construction contractor Beard said: “Despite the marginal increase in overall construction output, inflationary pressures and the rising cost of raw materials such as fuel are beginning to take their toll on business activity.

“But none of these trends have come out of the blue. In reality, the sector has been preparing for this very situation as the year has gone on, and is already working within the constraints imposed by a tightening economy.

“While we should not play down the slowdown in some areas of the sector, the fact that commercial work continues to show an increase in business activity shows that there is still some confidence in the market and developers are continuing to commit to plans.”

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