Construction growth at seven-year high, but inflation fears remain

Construction output growth reached a seven-year high during May, but concerns remain about a combination of surging demand for construction materials and severe supply shortages both sparking a 24-year high level of cost inflation.

May’s monthly PMI data indicated that the UK construction sector remained on a strong recovery path, with output growth reaching its strongest since September 2014 - and new order volumes increased at the fastest pace since the survey began just over 24 years ago.

But input cost inflation was also at a survey-record high during May, reflecting a surge in demand for construction materials and severe supply shortages.

At 64.2 in May, up from 61.6 in April, the seasonally adjusted IHS Markit/CIPS UK Construction PMI Total Activity Index registered above the 50.0 no-change value for the fourth consecutive month and signalled the strongest rate of output growth for just under seven years.

House building (index at 66.3) was the best-performing category of construction activity in May, followed by commercial work (64.4). The latest increase in work on commercial projects was the steepest since August 2007, reflecting strong demand conditions following the reopening of customer-facing areas of the UK economy.

Civil engineering activity (index at 61.3) also increased sharply during May, although the pace of expansion eased slightly since the previous month.

The latest survey pointed to a rapid upturn in new business across the construction sector. Around 47% of the survey panel reported higher volumes of new work, while only 11% signalled a reduction. Construction companies attributed the surge in order books to strong demand for residential building work and high levels of confidence about the near term economic outlook.

New project starts and a sustained recovery in construction workloads resulted in another marked rise in staffing numbers during May. The rate of job creation was the fastest since July 2014. Moreover, sub-contractor usage increased at a survey-record pace.

Mirroring the trend for order books, latest data indicated a steep upturn in purchasing activity across the construction sector. Some firms also noted that input buying had been boosted by efforts to build inventories in response to supply shortages.

Suppliers' delivery times lengthened sharply in May, with the downturn in vendor performance the second-steepest since the survey began (exceeded only by that seen in April 2020).

Stretched supply chains and steep rises in raw material prices contributed to a rapid increase in average cost burdens. The overall rate of input price inflation was the highest in just over 24 years of data collection.

Construction companies remain highly upbeat about their growth prospects for the next 12 months. Around 61% of the survey panel predict a rise in business activity, while just 8% anticipate a decline. Positive sentiment was mostly attributed to resurgent customer demand, alongside optimism about the UK economic outlook following the successful vaccine roll out.

Tim Moore, economics director at IHS Markit, which compiles the survey, said: "Despite severe challenges with materials availability, construction firms remain highly upbeat about their near-term growth prospects. Nearly two-thirds of the survey panel forecast an increase in output during the year ahead, while only one-in-thirteen forecast a decline."

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: “With inflation for goods and raw materials at a 24-year high, companies will be concerned that much-needed profits will be eaten away as building projects take shape and could be held up by some of the longest delivery times on record. Skills shortages are also becoming a problem, with recruiters finding talented labour hard to find, as job creation was at robust levels and the threat of staffing cutbacks has become a distant memory.”

Commenting on the figures, Matthew Farrow, director of policy at the Association for Consultancy and Engineering, said: “We should all be pleased at the continued good news in terms of demand across the residential, commercial and civil engineering sectors. With activity at a record high, there is plenty to welcome as our recovery continues to play its vital role kickstarting wider economic growth. The knock-on effect of this, however, are shortages in materials, as recently highlighted by the Construction Leadership Council, and skills. While these are potentially concerning, I hope the industry will work together to mitigate the impact of any medium-term shortages.”

Max Jones, director in Lloyds Bank’s infrastructure and construction team, said: “A recovery fuelled by pent-up demand isn’t without risks. What’s been impossible to ignore over the past month is the strain placed on the supply of key materials and the price rises this has brought about. Many merchants are now placing limits on the amount that contractors can buy, stifling long-term planning.

“Work ramping up on HS2 is generally good, especially for regional contractors, but also poses issues. There’s a worry it will prove a magnet for the industry’s best talent, leaving skills vacuums elsewhere and an imbalance between what contractors are being asked to do and what they can deliver. It will also fast-track some sustainability elements of the industry that many have been putting off, with ESG-credentials seen as a ‘licence to operate’ on-site. The long-term gain from this will be worthwhile but in the short run it may eat into bottom lines.”

Jan Crosby, UK head of infrastructure, building and construction, at KPMG said: “As confidence in the UK economy increases the commercial construction sector is bouncing back to meet client demand, and national infrastructure projects are pressing ahead. But as workloads rise the global supply chain bottlenecks remain an issue leading to delays waiting for materials, causing an inflationary rise in the cost of builds – frustrating for a sector which is trying to respond to heightened demand. Overall the sector should be upbeat about these latest figures and confident in committing to new projects.”

Mark Robinson, group chief executive at public sector procurement specialists SCAPE, welcomed the growth in output but warned that continued material shortages threatened to throw budgets and timescales off-course. 

He said: “Despite another month of strong growth, the construction industry cannot afford to become complacent as it approaches peak building season amid a concerning rise in material costs. As the wider economic recovery continues to accelerate, it is at this point – with material shortages driving record levels of inflation – that project timetables and the stability of contractors may be affected. With trade barriers unlikely to be removed in the second half of the year, attention will need to turn to careful project and cost management to ensure that supply chains remain resilient, new schemes start as planned and the recovery continues at pace.”

Meanwhile, the Federation of Master Builders (FMB) said the skyrocketing price of building materials is disproportionately impacting on the industry’s smallest firms.

Brian Berry, FMB chief executive, said: “Rising material prices are continuing to limit the ability of local builders to build back better from the pandemic. It’s incredibly worrying to hear that the overall rate of input price inflation was the highest on record. This is consistent with FMB State of Trade data that shows 93% of builders reported material price increases in Q1 of this year. Against the backdrop of high levels of inquiries for building work, it’s imperative that smaller businesses have the same access to materials as the larger firms during these difficult times.”

PMI data was collected between 12-27 May 2021.