PMI sees construction optimism at near two-year low

The weakest rise in residential work for two years held the construction sector back during May, with total activity expanding at its slowest pace since January and inflationary fears all contributing to the lowest levels of industry optimism since since August 2020

The latest monthly bellweather PMI® data for May signalled another growth slowdown in the construction sector amid a considerable loss of momentum for the residential category. The latest rise in housing activity was the weakest since the recovery began two years ago.

Survey respondents suggested the subdued consumer confidence and worries about the economic outlook had constrained demand.

Higher borrowing costs and intense inflationary pressures were also cited as factors likely to hold back growth over the next 12 months. The latest survey data indicated that business activity expectations at construction companies were the least upbeat since August 2020.

The headline S&P Global / CIPS UK Construction Purchasing Managers’ Index® (PMI®) – which measures month-on-month changes in total industry activity – registered 56.4 in May, down from 58.2 in April and the lowest reading for four months.

Weaker trends in the house building sub-sector were the main brake on growth, with this index falling to 50.7 from 53.8 in April. Moreover, the latest reading signalled the worst performance for residential work since May 2020.

Commercial building was the fastest-growing segment in May (index at 59.8), with the speed of expansion easing only slightly since April. Construction companies noted strong demand for commercial work, despite a degree of hesitancy due to the uncertain economic outlook.

Meanwhile, civil engineering activity increased for the fifth month running and at a robust pace (index at 55.5) amid a sustained boost from major infrastructure projects.

Total new orders expanded again in May, which marked two years of continuous sales growth in the construction sector. That said, the latest increase in new work was the slowest since December 2021.

Job creation accelerated slightly in May and was the strongest for four months. Survey respondents typically cited efforts to boost capacity and meet rising customer demand. There were again widespread reports citing recruitment difficulties due to shortages of suitably skilled candidates.

May data highlighted strong demand for construction products and materials, as signalled by a steep and accelerated rise in total purchasing volumes. Efforts to replenish stocks and pre-purchase ahead of price rises also contributed to higher purchasing activity in May, according to survey respondents.

There were positive signals for supplier performance in May, as delays were the least widespread since February 2020. Some firms noted an improvement in the availability of construction items, despite ongoing challenges including logistics bottlenecks, Brexit trade frictions and supplier staff shortages.

Rapid cost inflation persisted in May, with the vast majority of survey respondents (73%) reporting a rise in purchasing prices. This was linked to rising fuel, energy and raw material costs. That said, the overall rate of inflation eased to a three month low.

The number of construction firms predicting an increase in business activity during the year ahead (46%) continued to exceed those expecting a decline (19%) by some margin.

However, the resulting index measuring overall growth expectations across the construction sector signalled the weakest degree of optimism since August 2020.

Construction companies suggested that lower consumer confidence, rising borrowing costs and heightened economic uncertainty were all likely to act as headwinds to client demand in the next 12 months.

Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey said: "New order volumes expanded at the slowest pace since the end of 2021, which added to signs that heightened economic uncertainty has started to impact client spending. On a more positive note, supplier delays subsided in May, with the latest downturn in performance the least marked since February 2020. Meanwhile, rapid price pressures persisted due to rising energy, fuel and staff costs, but the overall rate of inflation eased to a three month low in May."

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: "Though still offering a comfortable margin above the no change mark, the construction sector saw growth ease to a four-month low with the usual suspects taking the heat out of the recovery – elevated inflation, future uncertainty and supply-chain disruption. The lack of positive sentiment was also reflected in construction companies’ confidence over the next 12 months, with optimism dropping to the weakest since August 2020 even though this was the best performing sector out of the three.”

Stephen Marcos Jones, CEO of the Association for Consultancy and Engineering (ACE) said: “The figures once again show the effect inflation is having on business confidence. It concurs with our own snap survey of ACE members, released today, which revealed that 80% of respondents see inflation as a longer-term issue. It also highlighted the impacts already being felt on wages, energy costs, project delivery and client confidence. It demonstrates that no segment of the construction industry is immune from higher inflation.

“A positive is that in spite of these challenging circumstances, we’re seeing construction output continue to rise overall, and the slight easing of inflationary growth will be welcome as we look ahead.”

Brian Smith, AECOM head of cost management UK&I, said: “In the face of enduring business and operational challenges, industry activity and confidence is holding up well in the circumstances. Cost and price inflation will persist into the medium-term at an elevated rate. Higher inflation will continue to act as a drag on future construction sector growth and new orders, due to its currently outsized influence on pre-contract and client decision-making processes.”

Mark Robinson, group chief executive at SCAPE, said: “Construction has long been a bellwether for the wider UK economy so its performance should concern everyone. The ongoing conflict in Ukraine continues to place pressure on material prices across the supply chain and labour shortages remain problematic. Looking ahead, further interest rate rises could start to curb the appetite for private developers in some sectors like residential.”

PMI data was collected between 12-30 May 2022.