NuGen Properties

Commercial sector leads construction’s February rebound


The monthly survey of construction buyers suggests that construction activity grew more quickly last month than it has done since last spring.

Commercial work led the way and civil engineering activity also grew, but house-building activity decreased once again for a third successive month.

The headline seasonally adjusted S&P Global / CIPS UK Construction Purchasing Managers’ Index (PMI) registered 54.6 in February, up from 48.4 in January and above the neutral 50.0 threshold for the first time since November. The latest reading was the highest since May 2022.

Total new work picked up in February, as signalled by an improvement in order books for the first time since November 2022. Construction companies reported signs of a turnaround in demand for commercial projects due to the improving near-term economic outlook.

Forthcoming project starts contributed to a modest upturn in purchasing activity. Despite rising demand for construction products and materials, the latest survey indicated that supply pressures continued to ease. The respective index signalled that delays with vendor delivery times were the least widespread for more than three years.

This also contributed to a reduction in input price inflation with prices rising at their slowest since November 2020. Higher input costs were mostly linked to suppliers passing on rising energy bills and salary inflation, but this was offset by lower transportation bills.

Business expectations for the year ahead improved further from the 31-month low seen in December 2022. Around 46% of the survey panel anticipate a rise in construction activity over the year ahead, while only 13% predict a decline. The resulting index pointed to the highest level of optimism for 12 months. Construction firms often noted signs of a recovery in client demand, despite interest rates and recession risks.

Tap/click on graph to enlarge
Tap/click on graph to enlarge

Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey, said: “Business activity in the UK construction sector returned to growth during February as a rebound in commercial work and civil engineering output helped to compensate for housing market weakness. Some firms noted that fading recession fears and an improving global economic outlook had boosted client confidence in the commercial segment. At the same time, work on major infrastructure projects such as HS2 contributed to the expansion of civil engineering activity in February.

“Cutbacks to new house building projects remained the weak spot for construction sector activity, with total residential work falling for the third month running in February. Survey respondents often commented on subdued demand and a headwind from elevated interest rates.

“Construction companies appear increasingly confident about the year ahead business outlook, with optimism rebounding strongly from the lows seen in the final quarter of 2022. Softer inflationary pressures and the least widespread supplier delays for just over three years were factors supporting business expectations in February.”

John Glen, chief economist at the Chartered Institute of Procurement & Supply, said: “The overall figure paints a bright picture of progress in the construction sector with a robust jump in output last month. Supply deliveries were at their most improved since January 2020 and some commentators mentioned sourcing closer to home to avoid logjams in supply chains caused by China’s Covid policy and the war in Ukraine.

“New order levels were also at their highest since November 2022 but these strong numbers belie the fact that there is uneven growth in building activity in the UK. Commercial and civil engineering projects dominated this performance with activity on projects such as HS2 and commercial builds. Residential building on the other hand was the odd one out with a third month in contraction as mortgages rates put a dampener on the number of house purchases and buyers were unwilling to commit.

“Builders themselves remained cheerful as optimism rose sharply and almost half of the survey’s respondents believed business would improve in 2023. With the slowest inflationary rises for raw materials since November 2020 this offered some relief, and it was cheaper transportation costs that helped offset salary and energy costs, which were still rising.”

Tap/click on graph to enlarge
Tap/click on graph to enlarge

However, not every is so optimistic. Brendan Sharkey, head of construction and real estate at accountancy group MHA, believes that UK construction is on the cusp of a slowdown.

“Today’s PMI reveals that February was a very strong month for UK construction. However, in reality, the picture is very mixed. Some construction firms are coping well and some are not,” he said.

“At this time of year for many regional builders a lot rides on the local authorities. Some are pushing lots of work through before they close their 2022/23 books in March. This is boosting activity but the overall picture is a bit gloomy when looking forward.

“The London market feels like it is heading for a slowdown and all the big house builders forecast contraction over the next year. One or two well-established construction firms have already declared themselves insolvent. Its looks like we’re straining to avoid a recession with new orders declining and the prospect of more interest rate rises.

“Material supplies are not a problem but the labour shortage is still a key issue. Too many firms are fighting off the effects of rising costs with fixed price contracts. Some firms are successfully winning new work under better terms but are experiencing delays which tests the adequacy of working capital.

“Hopefully the strong performance we saw in February continues. If not and we do see a downturn then regrettably the building industry regularly goes through these periods and firms have to remain optimistic that the market will turn around and they will survive to benefit.”

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