Data signalled a modest upturn in overall UK construction output

• Total activity increases at fastest pace for three months
• Growth driven by commercial and civil engineering activity
• House building falls at steepest rate since May 2020 but Government to release massive funding to ease access to finance.

Data signalled a modest upturn in overall UK construction output, driven by faster rises in commercial building and civil engineering activity. Meanwhile, house building remained by far the weakest-performing category of activity, with output declining at the steepest pace for three years.

Supply conditions continued to normalise in May, as highlighted by the greatest improvement in vendor lead times since August 2009. This helped to alleviate cost pressures across the construction sector, with the overall rate of input price inflation easing to its weakest for 32 months.

The headline seasonally adjusted S&P Global / CIPS UK Construction Purchasing Managers’ Index® (PMI®) – which measures month-on-month changes in total industry activity – registered 51.6 in May, up from 51.1 in April and above the neutral 50.0 mark for the fourth successive month.

Although indicative of only modest growth, the latest reading pointed to the strongest upturn in total construction activity since February. There were again divergent trends across the three main categories of construction activity. Commercial building (index at 54.2) was the best-performing segment, with output rising at a robust and accelerated pace. Construction companies cited a gradual turnaround in confidence among clients and faster decision-making on new projects.

Civil engineering also gained momentum (index at 53.9), with growth hitting an 11-month high in May. Worries about the impact of higher interest rates and subdued market conditions continued to dampen housing activity. Work on residential building projects decreased for the sixth month running and at the steepest pace since May 2020. Aside from the pandemic-related downturn, the latest reading for this category of construction activity (42.7) was the lowest for just over 14 years.

Total new business meanwhile increased at a strong pace in May, despite weakness in the house building sector. The overall rise in construction order books was the strongest recorded since April 2022. This spurred an upturn in staffing numbers for the fourth month in a row. However, input buying remained broadly unchanged during the latest survey period, which partly reflected efforts to reduce excess inventories.

Supply conditions improved considerably in May. Average lead times for the delivery of construction products and materials shortened to the greatest extent since August 2009. This was attributed to fewer logistics bottlenecks, alongside an improved balance between demand and supply.

Purchasing price inflation eased sharply since April, which some firms linked to rising competition among suppliers alongside softer demand for construction inputs. Although still signalling a robust increase in cost burdens, the latest survey data indicated the weakest rate of inflation for just over two-and-a-half years.

Finally, construction companies remain upbeat about their growth prospects for the year ahead. Around 45% of the survey panel expect an increase in output levels, while only 14% predict a decline. That said, the degree of positive sentiment slipped to a four-month low in May. Survey respondents suggested that concerns about the UK economic outlook and the impact of rising interest rates were the main factors holding back growth projections in May.

Tim Moore, Economics Director at S&P Global Market Intelligence, which compiles the survey said:

"May data highlighted a mixed picture across the UK construction sector as solid growth rates in commercial and civil engineering activity contrasted with a steeper downturn in house building. Rising demand among corporate clients and contract awards on infrastructure projects meanwhile underpinned the fastest rise in new orders since April 2022."

"However, cutbacks to new residential building projects in response to rising interest rates and subdued housing market conditions resulted in the sharpest drop in housing activity for three years. This meant that residential work underperformed the rest of the construction sector by the greatest margin since October 2008. Survey respondents also commented on concerns about the broader UK economic outlook, which contributed to an overall drop in output growth projections to the lowest for four months."

"Inflationary pressures meanwhile eased considerably May, with purchase prices increasing to the smallest extent since September 2020. Supply chain normalisation helped to moderate cost inflation, as signalled by the strongest improvement in delivery times for construction products and materials for almost 14 years."

Dr John Glen, Chief Economist at the Chartered Institute of Procurement & Supply (CIPS), said:

"Though overall output in the construction sector showed an improvement for the fourth month in a row, the steepest drop in house building activity since April 2009, barring the initial pandemic lockdown in early 2020, will send a chill down the spine of the UK economy."

"The residential sub-sector is closely linked to consumer confidence and levels of spending. A further hike in interest rates is expected this month, and along with the relentless increase in the cost of living is making buyers hesitate about purchasing homes. As a result, builder confidence was pinched to remain below the survey average, as business costs remained high and firms expanded their workforce numbers at only a modest pace as they were cautious about their own affordability rates."

"Even with the strongest increase in new orders for just over a year, where commercial and civil engineering projects made up the shortfall, purchasing activity remained flat. Companies were de-stocking their built-up supplies because, with the fastest turnaround in supplier delivery times since August 2009, builders expected that demands for materials would be met should a longawaited sustainable upturn ever arrive."

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Total Builders Merchants value sales

Builders Merchants value sales were down -6.7% in March 2023 compared with March 2022. Volume sales were -19.7% down with price up +16.2%. There was no difference in trading day. Nine of the twelve categories performed better than Merchants overall, including Renewables & Water Saving (+26.6%), Workwear & Safety wear (+19.7%), Plumbing, Heating & Electrical (+8.4%), Decorating (+7.9%), and Kitchens & Bathrooms (+7.3%). Services (-9.6%), Timber & Joinery Products (-17.0%) and Landscaping (-25.6%) sold less. •

Total Merchants sales were 14.8% higher in March 2023 than in February 2023. With three more trading day this month, like-for-like sales were -0.1% lower. Landscaping (+9.0%) was up the most, followed by Workwear & Safety wear (+3.7%) and Timber & Joinery Products (+1.3%). Plumbing, Heating & Electrical (- 4.1%) and Renewables & Water Saving (-8.8%) were weakest. Quarter 1 2023: •

Total Builders Merchants value sales were down -2.3% in Q1 compared with the same period last year. Volume sales were -16.4% lower with price up +16.9%. There was one more trading day this quarter compared with last year.

When looking at like-for-like sales (which take trading day differences into account), nine of the twelve categories sold more, including Renewables & Water Saving (+40.0%), Workwear & Safety wear (+13.1%), Decorating (+12.2%), Plumbing, Heating & Electrical (+11.0%), and Kitchens & Bathrooms (+6.9%). Services (-6.0%), Timber & Joinery Products (-16.6%) and Landscaping (- 19.5%) sold less. •

Total Merchants sales were 5.8% higher in Q1 2023 than in Q4 2022. With five more trading day this quarter, like-for-like sales were -2.5% lower. Renewables & Water Saving (+12.8%) was up the most, followed by Miscellaneous (+3.8%). Workwear and Safety wear (-10.0%) was weakest. •

Total sales in April 2022 to March 2023 were 2.3% higher than in the same period a year earlier. With two trading day less in the most recent 12 months period. Ten of the twelve categories sold more. Renewables & Water Saving (+36.2%), Workwear & Safety wear (+16.2%), and Kitchens & Bathrooms (+15.4%) did best. Timber & Joinery Products (-10.1%) and Landscaping (-7.6%) were weakest.

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Qtr snapshot of Chain store traffic

Case Study: Wickes

Wickes points to rising inflation and interest rates that mean the housing market has slowed, in terms of both house prices and sales. But the retailer says it continues to benefit from post-Covid changes that still see more people working from home and consequently investing more in their homes, while the need to improve energy efficiency is still a key driver for its market during sharp rises in energy prices.

The retailer says it has efficiency plans in place to offset its own inflationary pressures, with the exception of energy – set to cost it £10m more in 2023 than in 2022.

Full-year figures

The update came as Wickes this week reported revenues of £1.6bn in the year to December 31 2022. That’s 1.8% up on the previous year. On a like-for-like basis, which strips out the effect of store openings and closures, sales were 3.5% up.

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Pre-tax profits before one-off costs came in at £75.4m, down 11.3% from £85m in 2021 as the retailer kept its prices below the rate at which inflation increased its costs. At the bottom line, after one off costs of £35.1m, primarily relating to the £24.4m cost of separating Wickes’ IT systems from its former parent company Travis Perkins, pre-tax profits of £40.3m were 38.4% down on the previous year.

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In the first 11 weeks of its current 2023 financial year, Wickes says that its core product sales are “moderately” behind the same time last year, trade sales are growing and DIY is normalising. DIFM (do it for me) sales are “slightly ahead year-on-year due to the elevated order book”.

Wickes chief executive David Wood says: “This was a period in which we achieved record sales and made further market share gains. While profit declined, the outcome is still significantly ahead of the pre-Covid period. Our performance was underpinned by our balanced business model, digital leadership and ability to offer the best value and service across trade, DIFM and DIY.”

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Product Availability Statement

Statement from John Newcomb, CEO of the Builders Merchants Federation and Peter Caplehorn, CEO of the Construction Products Association, co-chairs of the Construction Leadership Council’s Product Availability working group.

Further to last month’s statement, once again there is good availability of most building materials across the UK, with the exception of rock mineral insulation, which is now on allocation, but is expected to normalise soon with increased production capacity.

While there are also some reports that plasterboard and roof tiles are on allocation, these appear to be either localised issues or restricted to a limited number of manufacturers, so do not seem to be creating significant problems in any sector.  In addition, no major availability issues have been cited around either electrical components or timber, which in previous months were proving problematic.

At a macro level, construction output has risen by 2.7% since the start of the year despite adverse weather and various other factors such as strike action.  The main area of growth over the past quarter has come from the repair and maintenance sector, but the commercial and civil engineering sectors have seen improvements as well. The associated retail trade has started to pick up with the return of  warmer weather.

In the infrastructure sector there have been few reports of material shortages, but materials inflation still plays a major part in increasing project costs. The end of the Help to Buy scheme and continued uncertainty over interest rates, and its impact on mortgage availability, is constraining housebuilding.  The consensus for sector forecasts is that year on year demand will be down this year before picking up in in 2024. More broadly and with a general election looming in 2024, positive stimulus by government in any of these sectors may boost fortunes for the industry.

Overall, ONS figures show that materials prices rose 8.4% in the first four months of the year, with inflation levels slowing to 4.7% in April.  Looking ahead, however, although many larger manufacturers of energy intensive products have begun hedging their energy contracts into 2024, the costs of those products will likely remain elevated compared to the levels seen before the outbreak of war in Ukraine.

We are also monitoring the impact of drought conditions – including higher prices and delays to deliveries – affecting key logistic routes and shipping volumes from Asia and China and through the Panama Canal – though no firm data is yet available.

We are also aware that, with the availability and cost of financing options increasingly limited, commercial behaviour is likely to harden putting pressure on lower tiers and SME companies reducing cash-flow capacity and making liquidity a greater challenge.  With the number of administrations in the construction sector at a very high level, this is another area we will continue to monitor.

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That's a Wrap! 

We hope this information in the report has been of some use to you. We do try to collate information from as many different areas as possible so please do refer to last quarters report as well for a crossover of information as some data sets are released at different intervals through out the year.

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If you are already a client of Saint, please feel free to discuss with your business development manager to discuss this report and to provide specific data for your sector

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