Construction Growth Slows to 3 Month Low in December

Graph showing activity index UK construction growth IHS Markit/CIPS

THE RATE OF construction industry expansion in December 2021 was solid but growth slowed, slipping back to September levels.

However, the number of construction firms reporting supplier delays dropped from 47% in November to 34% in December. Meanwhile, around 5% of the survey panel reported shorter lead times among vendors (up from 4%). The resulting index signalled the least marked downturn in supplier performance since November 2020.

Fewer supply shortages contributed to the slowest rate of input price inflation for nine months.

Construction Growth

The headline seasonally adjusted IHS Markit/CIPS UK Construction PMI® Total Activity Index posted 54.3 in December, to remain above the crucial 50.0 no-change threshold. However, the latest reading was down from 55.5 in November and signalled the weakest rate of expansion for three months.

Some survey respondents noted that tighter pandemic restrictions and rising COVID-19 cases had acted as a brake on recovery, especially in the commercial sector.

Graph showing sector activity in construction December 2021

Residential

Residential construction activity saw the strongest growth (index at 55.3) and was the only category to gain momentum in December.

Commercial

Commercial building lost its position as the best-performing segment, with the recovery easing to its lowest since September (index at 53.6).

Civil Engineering

Meanwhile, civil engineering activity decreased slightly at the end of 2021 (index at 49.1), which ended a nine-month period of expansion.

Demand

Customer demand was relatively resilient in December, despite some reports citing delayed decision-making due to the Omicron variant. In fact, the latest rise in overall new order volumes was the strongest since August. Higher levels of new work have now been recorded for 19 consecutive months.

Graph showing construction employment December 2021

Employment

A sustained rebound in construction orders helped to boost employment numbers during December. The rate of job creation eased only slightly since November. Survey respondents often commented on extra staff hiring as part of new protect starts and long-term expansion plans.

Energy

Higher fuel, energy and raw material prices continued to push up average cost burdens across the construction sector in December. However, the overall rate of inflation eased for the fourth month running to its lowest since March.

Graph showing construction costs and supply in December 2021

Costs and Supply

An improved alignment between demand and supply helped to soften inflationary pressures at the end of 2021. Purchasing activity increased at the slowest pace for three months, while supplier lead times lengthened to the least marked extent since November 2020. Where longer wait times were reported, this was mostly linked to international shipping delays and shortages of haulage drivers.

Looking ahead, just over half of the survey panel (51%) forecast a rise in business activity during 2022, while only 9% predict a decline. Although signalling upbeat sentiment for the year ahead, the degree of optimism was the joint-lowest reported since January 2021.

Tim Moore, Economics Director at IHS Markit

Tim Moore, Director at IHS Markit, which compiles the survey said: UK construction companies ended last year on a slightly weaker footing as renewed pandemic restrictions held back the recovery, especially in commercial work and civil engineering. Some firms commented on disruption from rising COVID-19 cases, while others noted a lack of new work to sustain the rapid growth rates seen earlier in 2021.

“The worst phase of supplier delays seems to have passed as the availability of construction products and materials continued to turn a corner in December. While suppliers to the construction sector have caught up on backlogged work and boosted capacity, there were still widespread reports citing unresolved transportation issues and driver shortages.

“Input cost inflation moved down another notch in December, helped by the alleviation of some supply chain pressures. The latest rise in purchasing prices was far slower than the 24-year peak seen last June.”

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Duncan Brock, Group Director at the Chartered Institute of Procurement and Supply.

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said: “Though the overall index moved down slightly in December there was light at the end of the tunnel for builders in terms of the strongest order numbers since August, reduced pressure on business costs and some improved delivery times for essential materials.

“Residential building has powered on every month since June 2020 and was the best performing category in the last month of 2021. Commercial building struggled to gain a stronger footing in a weakened UK economy and civil engineering activity fell back into contraction.

“Though supply constraints were still hiking up prices, inflation was the lowest since March as materials production carried on apace reducing supply restrictions. It was shipping delays and haulage shortages that remained the significant gripes in the industry as over a third of supply chain managers faced longer wait times. Though this was an improvement on the previous month and the best since November 2020, it was still a factor affecting builders’ forecasts for 2022 as business optimism fell to the joint-lowest for almost a year.”

INDUSTRY RESPONSE

Labour Supply Number One Issue

Joe Sullivan, Partner at MHA, says: “The availability of labour is now the number one issue within the UK construction sector, with wages continuing to rise. Staff mobility is high as people look for the best pay packets, causing further disruption. In addition, the spread of the Covid-19 Omicron variant has inhibited progress on building sites, dampening output and making planning even more difficult.

“However, despite these challenges, confidence in the construction sector is still quite strong. There are signs that the supply chain crisis is easing. Firms have noticed small improvements in the availability of supplies and the rate of material price increases may have peaked. Although certain decisions may be deferred until the Omicron variant abates, all indications are that plenty of work is available as we begin 2022.

“The recent 0.15% increase in the Bank of England base rate is unlikely to disturb the residential housing market, as strong demand persists, and most homeowners have fixed rate mortgages. It is the start of an attempt to curb inflation, but not an event to cause a concern to growth at present.”

Fraser Johns, finance director at Beard
Fraser Johns, finance director at Beard

New Year Opportunities

Fraser Johns, finance director at Beard, said: “While growth slowed in December, the overall picture is a positive one. Supplier delays are easing slightly, price inflation is reducing and starting to find its new level, and customer demand has remained resilient.

“We are clearly still not quite out of the woods, with Covid cases rising and remaining uncertainty surrounding this latest variant.  Construction firms will need to ensure their safety measures are up to scratch.

“While there are certainly challenges, the new year will present opportunities. Customer demand hasn’t been hampered too much by the new variant, and in fact the latest rise in overall new order volumes was the largest since August.

“To be successful in 2022 construction firms will need to be adaptable to overcome the hurdles on the horizon, which entails strong collaboration with all stakeholders. At Beard we are implementing thorough measures to help protect staff and we continue to keep our relationships with suppliers top of our agenda, ensuring frequent communications and prompt payments.  This will continue to benefit all stakeholders from suppliers through to the end customer.”

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