Housing activity drives construction output rise in October

UK construction companies recorded a sustained expansion of overall business activity in October, led by another solid increase in residential work. New order volumes also picked up across the construction sector, but the rate of growth eased since September and remained weaker than seen prior to this summer.

This contributed to a drop in business confidence regarding the year-ahead growth outlook, with the latest reading the second lowest since May 2013. At the same time, input costs rose at one of the fastest rates seen over the past five years, which survey respondents widely linked to the weaker pound.

Highlights

• Business activity increases at fastest pace since March
• Residential work remains key growth engine
• Input price inflation close to its highest since mid-2011

At 52.6 in October, the seasonally adjusted Markit/CIPS UK Construction Purchasing Managers’ Index® (PMI®) edged up from 52.3 in September and remained above the 50.0 no change threshold for the second month running.The latest reading pointed to the fastest upturn in activity since March, although the rate of growth was only modest and still much softer than the average since the recovery began three-and-a-half years ago (57.3).

Housing activity remained the key growth driver across the construction sector in October. Latest data signalled a solid increase in residential building work, and the pace of expansion was only slightly weaker than September’s eight-month peak. There was also a stabilisation in commercial construction activity during October, while civil engineering decreased slightly and was the weakest performing broad category of activity.

New business growth was only moderate in October and still much weaker than seen during the first quarter of 2016. Some firms noted that Brexit-related uncertainty had continued to act as a brake on client confidence and resulted in delayed spending decisions.

Nonetheless,construction companies reported a further upturn in their staffing levels and purchasing activity during the latest survey period. The rise in input buying was the fastest since March, which contributed to a sharper deterioration in supplier performance in October. Input prices increased at the second-fastest rate since July 2011 (exceeded only by the rise in costs reported this August). Anecdotal evidence suggested that suppliers had sought to pass on higher imported raw material prices following the sharp depreciation of sterling against the US dollar and euro. Some construction companies also pointed to greater transportation costs in October. 

Looking ahead, the number of construction firms expecting a rise in business activity over the next 12 months (43%) continued to exceed those that forecast a reduction (14%). However, the latest reading was down markedly sinceSeptember and the second-lowest since May2013. A number of survey respondents cited the impact of Brexit uncertainty on investor sentiment, alongside reduced confidence towards the general economic outlook. 

David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply, said: “Housing proved to be the most resilient driving force behind the continued moderate expansion of activity – the fastest since March, but, the level of new order growth was at a weaker level than seen earlier in the year.

“Supplier performance deteriorated slightly reflecting the ongoing trend of low stocks seen in the last few months, as the level of input buying increased at its fastest rate since March.

“A rise in input prices due to the weak pound resulted in the second-fastest increase in cost pressures since mid-2011.

“Respondents reported a squeeze on margins,while increased marketing and new projects helped counteract the continuing uncertainty surrounding the Brexit aftermath. Coupled with concerns around the longer-term performance of the UK economy, this dampened overall business optimism to its second-lowest level since May 2013.”