Construction output rises at slowest pace for five months amid weaker housing activity growth

CIPS 4 November 2014

New business volumes increase at slowest pace for five months

Markit/CIPS UK Construction PMI®

- Construction output expands at weakest rate since May...
- led by sharp slowdown in residential building growth
- New business volumes increase at slowest pace for five months

October data indicated a strong overall increase in UK construction output, but the pace of expansion was the weakest since May. All three broad areas of construction activity posted a slower rise in output, led by the slowest upturn in residential building for 12 months. The seasonally adjusted Markit/CIPS UK Construction Purchasing Managers’ Index® (PMI®) registered 61.4 in October, down from 64.2 during September and the lowest reading for five months. However, the index remained well above the neutral 50.0 mark and was much higher than the long-run survey average (54.5).

Higher levels of business activity have now been recorded for 18 consecutive months, which is the longest continuous period of growth since the onset of the global financial crisis in 2007/08. Commercial activity was the strongest-performing category of construction output in October, despite this sub-sector posting its slowest pace of growth for five months.

Although still sharp, the latest expansion of housing activity was the weakest for 12 months and much slower than in September. Some survey respondents commented that less favourable housing market conditions had resulted in greater caution among clients and delays to the launch of new development projects. Meanwhile, civil engineering activity was the weakest performing area of construction activity, but the rate of growth eased only slightly since September and remained well above its long-run average.

Softer growth of construction output reflected weaker new business gains in October. The latest increase in incoming new work was the slowest since May. Anecdotal evidence pointed to strong underlying demand for new construction projects, but there were some reports of delays to new contracts amid signs of a growth slowdown in the wider UK economy.

Construction companies continued to increase their staffing levels at a sharp pace in October, reflecting strong pipelines of existing work and resilient confidence towards the business outlook. More than half of the survey panel (55%) anticipate a rise in output over the next 12 months, while only 9% forecast a reduction. That said, the latest survey indicated that the pace of job creation eased slightly in October and was the least marked for six

In line with weaker new business growth, latest data highlighted that purchasing activity across the construction sector increased at the slowest rate for five months. This contributed to reduced pressures
on suppliers’ lead times in October, with vendor performance deteriorating to the least marked degree since July 2013. Nonetheless, survey
respondents still commented on stock shortages and widespread delays in the receipt of construction materials.

Deteriorating sub-contractor performance and availability continued during October. The latest survey also highlighted a rise in sub-contractor usage, as well as a sharp increase in hourly pay rates commanded by sub-contractors.

Commenting on the report, David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply, said: “This month the construction sector maintained an impressive growth trajectory and true grit with continuing strong levels of new business, albeit at a slower pace.

“Though it appears that the euphoria of the last few months is now settling down to a slightly more modest level of expansion, delivery times continue to lengthen and suppliers of raw materials are in high demand, making the completion of construction projects more challenging and showing how the
number of available suppliers has not yet reached pre-recession levels.

“The commercial sub-sector is this month’s star performer as residential housing expansion weakens. Although employment growth took a marginal dip this month in the construction sector, sub-contractors were able to make up the shortfall, with greater demand for their expertise helping t o push up salary rates at a near-survey record pace.”

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