Construction output returns to growth in July, says PMI report

Construction output returned to growth in July, according to the latest monthly PMI report.

Data signalled a renewed expansion of overall construction output, following the marginal decline seen during the previous month. 

This was led by the strongest rise in commercial building since February and another solid contribution to growth from civil engineering activity. 

Meanwhile, the latest figures showed another sharp reduction in residential construction activity. 

Survey respondents said higher interest rates and the uncertain UK economic outlook had constrained order books in July. 

The S&P Global/CIPS UK Construction Purchasing Managers’ Index® (PMI®) - which measures month-on-month changes in total industry activity – was 51.7 in July, up from 48.9 in June and the highest level for five months. 

However, the latest reading signalled only a moderate rise in overall construction output.

Robust increases in commercial building (index at 54.4) and civil engineering (53.9) were offset by a steep fall in house building (43.0). 

Lower volumes of residential work have now been recorded for eight consecutive months, although the rate of decline eased to its least marked since April

Construction companies noted rising borrowing costs had led to fewer sales enquiries and slower decision-making among clients in July. 

The latest survey pointed to only a marginal rise in total new work and the rate of growth was slower than seen on average in the first half of 2023. 

Some firms cited solid demand for refurbishment projects and greater opportunities for infrastructure work.

Staff hiring was a relatively bright spot in July, with the pace of job creation accelerating to its strongest since October 2022. Higher levels of employment have now been recorded in each of the past six months.

Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey said: “July data indicated that some parts of the UK construction sector gained momentum, notably commercial building and civil engineering activity. 

“This led to a renewed rise in total construction output which, although modest, was the fastest for five months. 

“Survey respondents commented on increased infrastructure work, office refurbishments, and resilient demand for a range of commercial projects. 

“Meanwhile, another steep reduction in house building acted as a severe constraint on construction growth. Around 35% of the survey panel reported a decline in residential work during July, while only 18% signalled a rise.” 

July data indicated weaker demand for construction inputs. 

Purchasing activity has now decreased in each of the past two months, which reflected destocking efforts alongside subdued order books. 

A combination of lower demand and rising material availability contributed to a sharp improvement in supplier performance. 

Latest data illustrated that lead times shortened to the greatest extent for nearly 14-and-a-half years. 

Some survey respondents suggested that increased competition among suppliers had helped to support more favourable price negotiations.

Business activity expectations for the year ahead remained positive overall in July and picked up slightly since the previous survey period. 

Reports from construction companies nonetheless indicated that pressure on customer budgets from higher interest rates remained a key factor holding back output growth projections for the next 12 months.

Dr John Glen, chief economist at the Chartered Institute of Procurement & Supply (CIPS), said: “Although the sector showed a slight uplift in activity in July, there is a question mark over the sustainability of this growth and the challenges that lie beneath the floorboards. 

“Decisions about buying a new home are being delayed by many consumers. Another fall in residential building levels and for the eighth month in a row, it’s obvious that UK interest rate rises and cost of living pressures have dealt a hammer blow to the housing sector. 

“The commercial and civil engineering sectors remained the only engines of growth last month. 

“For those that secured additional work, the best improvement in delivery times for raw materials since March 2009 will be music to their ears as supply chain disruptions improved and shortages lessened. Likewise the right skilled candidates found the best positions as job creation rose to the highest for nine months so there were some bright spots in the data. 

“In spite of more uncertainty and thinner margins, builders kept their confidence up and focussed on resilience in their operations as optimism about the next 12 months remained fairly steady.”

PMI data was collected from July 12-28.