Construction output growth hits 24-year high in June

Latest monthly PMI shows record output growth for June, but concerns remain on labour and material shortages driving inflation.

Construction output growth hit a 24-year high in June but, despite cautious industry optimism, concerns remain about labour and material shortages driving high inflationary pressures, according to the latest monthly PMI data for June.

While overall construction activity expanded at the fastest pace since June 1997, supported by another sharp rise in new orders, suppliers' delivery times also lengthened to the greatest extent since the survey began just over 24 years ago, surpassing the previous record seen in April 2020. Severe shortages of construction products and materials resulted in a survey record rise in purchasing prices in June.

At 66.3 in June, up from 64.2 in May, the seasonally adjusted IHS Markit/CIPS UK Construction PMI® Total Activity Index signalled the strongest rate of output growth for exactly 24 years. Sharp increases in business activity were seen across all three main areas of the construction sector monitored by the survey.

Construction work in the house building sub-category (index at 68.2) increased at the fastest pace since November 2003. The second-best performing area was commercial work (66.9), with output rising at the strongest rate since March 1998. Meanwhile, civil engineering activity rose sharply in June (60.7), but the speed of growth eased to a three-month low.

Survey respondents widely commented on a rapid turnaround in demand for new construction work, especially residential building and commercial projects related to the reopening of the UK economy. Total new orders have increased in each of the past 13 months, although the latest expansion was slower than May's survey-record high.

Construction companies indicated another month of sharply rising employment numbers, reflecting efforts to boost capacity and meet incoming new orders. The rate of job creation moderated since May but remained among the fastest seen over the past seven years. Moreover, sub-contractor usage increased at the steepest pace since the survey began in April 1997.

Around 77% of the survey panel reported longer lead times among suppliers in June. The seasonally adjusted index pointed to the worse month for supplier delays since the survey began just over 24 years ago. Construction companies overwhelmingly cited stock shortages among vendors, reflecting severe delays with shipping and haulage, especially for products sourced from the EU. In terms of building materials, panel members commented on short supply across the board, particularly cement, concrete, plaster, steel, timber and roof tiles.

Imbalanced demand and supply resulted in rapid cost inflation across the construction sector in June. Average prices paid for products and materials increased at survey-record pace. Adding to cost pressures in June was the steepest rise in rates charged by sub-contractors since the survey began.

Construction companies remain optimistic about growth prospects for the next 12 months. That said, the degree of confidence eased to its lowest since January, in part reflecting concerns about labour availability and the sustainability of the recent surge in demand. 

Tim Moore, economics director at IHS Markit, which compiles the survey, said: "The headline index signalled the fastest rise in business activity across the construction sector for 24 years. Supply chains once again struggled to keep up with demand for construction products and materials, with lead times lengthening to the greatest extent since the survey began in April 1997. Survey respondents widely reported delays due to low stocks of building materials, shortages of transport capacity and long wait times for items sourced from abroad. Escalating cost pressures and concerns about labour availability appear to have constrained business optimism at some building firms. The degree of positive sentiment towards the year ahead growth outlook remained high, but eased to its lowest since the start of 2021."

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: "A wave of new orders overwhelmed supply chains again this month where stock levels could not keep up with building work accelerating at the fastest rate since June 1997. These malfunctions in supply chain performance may be a global issue but this doesn’t help UK builders who are ready but unable to return fully to projects which was reflected in the lowest optimism since January. This surge in activity will lose momentum while labour availability along with key materials remain elusive."

Matthew Farrow, director of policy for the Association for Consultancy and Engineering, said: “The figures reflect growing confidence in the UK economy and the construction industry which is, of course, welcome. However, it is clear that the severe shortage of products and materials, as well as issues around transportation, are now having an adverse effect on lead times and putting inflationary pressure on prices.

“There is no easy fix to this problem, other than medium to long-term changes in our approach – I would hope that this leads to smarter design through the use of alternative materials, which could also have the added benefit of creating less carbon intensive buildings and structures and accelerating our path to net zero.”  

Mark Robinson, group chief executive at public sector procurement specialists SCAPE, said the 24-year high for June was very encouraging, but that concerns over skills and labour shortages remained in full view. He said: “The pace of growth in the construction sector shows no sign of slowing and it is a far cry from the historic low-levels recorded at the height of the pandemic. However, ongoing concerns over access to materials and skilled workers is driving up input costs and delaying some projects.

“While material shortages may pass, the skills and labour shortage is a long-term challenge which has only been amplified by the pandemic. It’s vital that the industry continues to invest in initiatives to train and attract the talent of tomorrow, while the government must ensure specific trades are included in the shortage occupation list to alleviate pressure.”

Jan Crosby, head of infrastructure, building and construction at KPMG UK, said: “The issues with delays in the global supply chain haven’t gone away, raw materials are still difficult to procure and costs are going up on what is available. These shortages and price rises are causing builds to be more expensive overall and making it difficult for the sector to plan for unexpected costs on projects. Opportunities are growing in hot markets such as data centres, logistics, residential and life sciences, whilst the infrastructure re-set will provide longer term opportunities including through freeports. Ultimately the materials and labour supply chains need time to rebalance – which they will – whilst also creating a catalyst for new ways of delivery and new entrants into the market.”

Kate Kirby, partner in the construction and infrastructure team at DWF, said: "The buoyancy across the whole sector seems to be contagious and with pandemic measures now relaxing and the economy reopening, it's pleasing to see the UK construction industry bouncing back so strongly. However, we need to keep a close watch on the factors that could destabilise this optimism. There has been increasing concern from those operating in the industry that materials shortages and rising costs could progressively impact the future success of the sector. The data today shows delivery times and prices are at all-time highs. But this doesn’t seem to be impacting on progress just yet."

Max Jones, director in Lloyds Bank’s infrastructure and construction team, said the threat of inflation, HS2-driven labour shortages and the ESG agenda were the main talking points clients were bringing up last month. He said: “Contractors hope that the start of summer will see the sun shining on their fortunes, but they’re also mindful of the risks of being burned. Pent-up demand for work on commercial projects in major cities, infrastructure in the regions and housing developments across the country threaten a battle for materials that many report are in short supply. This will create pinch points and potentially push up prices, eroding margins.

“HS2, which will be a major driver of work in the second half of the year, will expose some of the industry’s weaknesses. With the project attracting talent and skills from all over the country, it risks exacerbating the labour shortages contractors are already grappling with, partly as a result of a smaller pool of overseas employees.

“Last month’s opening of the Leeds-based National Infrastructure Bank will be key to helping firms and local authorities build back greener. As with other industries, ESG is increasingly influencing boardroom decisions and tier-one contractors now recognise the need to help supply chains meet their responsibilities. There’s an expectation that firms will be laser-focused on becoming more sustainable, though in part this may be dependent on the sector being in good health.”

PMI data was collected between 11-29 June 2021.

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