Construction Insider report covering a three month period up to August 2022

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Builders are feeling the pinch, seeing their profits tumble as the pressures in the economy mount. Small, local builders are facing an uncertain few months ahead with growing concerns about insolvencies, as they tackle increasing inflation, the knock-on effects of the war in Ukraine and a customer base looking to tighten its belts.

In the most recent State of Trade Survey from the Federation of Master Builders (FMB), a staggering 49% of small builders have had a negative impact on their profit margins in the last quarter. For many small, local tradespeople, these margins are often fairly tight even in the good times. The FMB warns that without clear political and economic direction, during the summer under the caretaker government, the industry will face an uncertain future.

Price rises are unrelenting with 98% of builders experiencing material cost increases and 81% passing on these costs to customers. Material shortages and struggles to find skilled labour still plague the sector causing job delays for the majority of FMB members. 71% of builders have delayed jobs due to a lack of materials and 61% are delaying work owing to a shortage of skilled tradespeople. Enquiries for new work are also down, at their lowest levels since the pandemic.  

The FMB State of Trade Survey, which is released quarterly, is the only survey of its kind to track the experience of small to medium-sized (SME) construction firms in the UK. The latest survey for Q2 2022 found:

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Impact on net profits  

• 49% of small, local builders have seen a negative impact on profit margins owing to the current economic climate.

 Market conditions

• 71% of small builders have delayed jobs because of a lack of materials.
• 61% of FMB members have delayed jobs due to a shortage of skilled tradespeople.
• Significantly fewer FMB members report a rise in enquiries, across all areas of work, compared to the last quarter.   
• Housebuilding enquiries are down sharply, tracking in negative territory for the first time since the pandemic.

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Skills

• 42% of FMB members are finding it difficult to hire bricklayers, up 2% on last quarter.
• 42% of builders are struggling to hire carpenters/joiners, down 3% on last quarter.

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Prices

• 98% reported an increase in material costs in Q2 2022.
• 95% of respondents expect material costs to increase in Q3 2022.
• 81% of builders have put up their prices for work.

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Brian Berry, Chief Executive of the FMB, said: “The statistics in this quarter’s FMB State of Trade Survey make for some grim reading. The industry appears to be at a turning point, and without any movement from a government stuck in paralysis, things will only get worse. The new government in September must hit the ground running and deliver ambitious solutions to stabilise the economy. One such solution might be to remove VAT on repair, maintenance and improvement work so that cost savings can be passed on to the consumer.”

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Berry continued: “The FMB’s survey also shows that long-term issues persist with materials and skills shortages continuing to delay building work. These issues and rising economic uncertainty don’t leave small, local builders in a good position. Many will need to put up prices to say afloat, but are faced with customers who are unwilling to spend as the costs of living spiral.”

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Contractors say inflation is hampering growth

 6 hours A report from property and construction consultant Gleeds reveals that eight out of 10 UK contractors have seen projects stall as a result of current economic uncertainty.

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Gleeds chief executive Graham Harle

Gleeds’ survey found that more than a quarter of contractors are predicting that tender opportunities will decrease as inflation, continued political instability and the war in Ukraine all sap confidence in the market in the short-term.

88% reported experiencing issues with labour supply over the past quarter, with 96% seeing the cost of labour rising (with worker’s pay attempting to keep up with the rising cost of living).

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In tandem with rising wages, the prove of building products and materials continues to rise and nearly 70% of survey respondents said that materials prices show no signs of stabilising.

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The longer-term view remains positive, with the prospect of a pipeline defence and energy work, and the transition to net zero.

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Gleeds chief executive Graham Harle said: “While there is hope that materials prices will stabilise, the ongoing conflict between Russia and Ukraine is likely to result in spiralling energy costs as alternative supplies are sought so I doubt we have seen the last of price rises. Meanwhile, as the cost-of-living crisis bites, staff expect to see their pay increase in response, and with a dearth of skilled labour available big business is willing to do whatever it takes to get enough boots on the ground to get the job done.

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“The Construction Industry Joint Council negotiated a 5% pay increase for site workers, which recently came into effect, and I think we’ll be seeing raises across the board in the months ahead, even though materials and labour cost escalation remains the number one threat to growth according to those we asked.”

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Construction purchasers report output in decline

 3 hours The latest monthly survey of purchasing managers indicates the UK construction industry is now in decline.

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The purchasers’ survey suggests that UK construction output fell in July 2022 for the first time in 18 months. Civil engineering activity has plummeted and only the commercial sector saw any growth last month.

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Despite a reduction in output, order intakes remain strong, fuelling jobs growth as construction companies sought to boost capacity. There has also been continued improvement in the general availability of materials, making supplier delays the least widespread since February 2020.

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The headline seasonally adjusted S&P Global / CIPS UK Construction Purchasing Managers’ Index (PMI) – which measures month-on-month changes in total industry activity – posted 48.9 in July, down from 52.6 in June. This was the first time since January 2021 that the index has been below the key 50.0 mark, the threshold between growth and contraction. Although only marginal, the rate of decline was the fastest since May 2020.

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Civil engineering was the worst-performing segment in July (index at 40.1), with business activity falling to the greatest extent since October 2020. House-building declined for the second month running, but the rate of contraction was only slight (index at 49.4). Commercial work bucked the downturn, scoring a modest 52.3 in July, indicating that growth here was the weakest for 18 months. Survey respondents commented on headwinds to client demand from rising inflation, fragile consumer confidence and higher interest rates.

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July data indicated an overall rise in new orders for the 26th consecutive month. But July’s upturn in new business was notably weaker than seen on average in the first half of 2022. As a result, some construction companies cited a lack of new contracts to replace completed projects.

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Employment numbers expanded at an accelerated pace in July and there were again many reports of difficulties filling vacancies and strong wage pressures.

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Construction firms noted upward pressure on business expenses from higher energy, fuel and transport costs, but this was partly offset by some easing in commodity prices, especially for metals and timber.

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Around 22% of the survey panel reported longer lead times from suppliers in July, while 7% signalled an improvement. Although still pointing to an overall downturn in vendor performance, the latest survey indicated that supplier delays were the least widespread since February 2020. Anecdotal evidence suggested that imported items remained the biggest area of concern, especially those from China and mainland Europe.

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A gradual turnaround in supply conditions and hopes of softer price pressures ahead meant that construction firms tempered their stock building efforts in July. As a result, purchasing activity expanded at the weakest pace since January 2021. Where higher levels of input buying were reported, this mostly reflected new project starts and hopes of rising business activity in the months ahead.

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Business optimism remained subdued across the construction sector in July, with growth expectations well below those seen in the opening months of 2022. That said, the degree of positive sentiment picked up slightly from June's 23-month low. Around 42% of the survey panel anticipate a rise in output during the year ahead, while only 15% forecast a decline. Recession concerns, the cost of living crisis and lower levels of consumer confidence were the most commonly cited factors affecting business expectations in July.

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Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey, said: "July data illustrated that cost of living pressures, higher interest rates and increasing recession risks for the UK economy are taking a toll on construction activity. Total industry output fell for the first time since the start of 2021 as civil engineering joined house building in contraction territory. Only the commercial segment registered growth in July, supported by strong pipelines of work from the reopening of hospitality, leisure and offices.

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"More positively, input cost inflation has retreated from the peak seen this spring as lower commodity prices and supply improvements gradually filter through to buyers of construction products and materials. The latest round of purchase price inflation was the least marked for 16 months, despite sustained pressure from escalating energy costs and staff wages, while supplier delays were the least widespread since the pandemic began.

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"Expectations for output growth in the next 12 months are far less exuberant than those seen over the past two years, amid concerns that elevated inflation and higher borrowing costs will constrain demand. Nonetheless, the degree of construction sector optimism picked up slightly since June, which ended a five-month period of falling confidence."

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Duncan Brock, director of the Chartered Institute of Procurement & Supply, said: "After several months of difficult conditions for builders, these challenges have now resulted in a contraction in construction with the biggest fall in activity since May 2020.

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"This disappointing result was felt across all the sectors, including housing which had demonstrated more resilience over the last couple of years, but fell for the second month in a row in July. However, it was civil engineering that fell the hardest and furthest. With fewer new orders in the offing, it may be some time before we see a rebound in this sector bearing in mind the time lag of infrastructure projects.

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"Builders optimism remained at the lowest levels seen for two years. Job creation was healthy to complete work in hand but the danger remains that should the UK economy turn unfavourable, this will affect job hiring and the development of key skills. A feather-like fall in prices may ease some of the pain as access to raw materials also improved, but prices at historically high levels will continue to hamper activity in 2023."

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Gareth Belsham, director of surveyors Naismiths, commented: “So far it’s a retreat rather than a rout, but it’s hard to sugarcoat these disappointing figures. Ebbing confidence and months of gradually slowing momentum have finally tipped the construction sector into contraction territory for the first time since the lockdown affected days of January 2021.

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“The pain is spread unevenly across the industry though, with infrastructure firms seeing the biggest fall in output. Housebuilding contracted only slightly, and commercial building increased. The flow of new work is slowing too, with many firms reporting that levels of new orders are significantly down on what they saw earlier this year.

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“That said, today’s report isn’t devoid of good news. The formerly runaway inflation in building material costs has slowed as prices ease for some key commodities such as metals and timber, and building firms continue to hire more staff. Looking ahead, rising interest rates will make some developers reassess their plans and will eventually cool demand from house buyers too.

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“These concerns have combined to make builders much more downbeat about the future than they were at the start of 2022, even if sentiment improved slightly in July after hitting a 23-month low in June. No-one is breaking out the ‘end is nigh’ sandwich boards yet, but the growth days are over for now – and the industry is digging in for a tough second half of the year.”

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Toby Banfield, financial restructuring partner at accountancy firm PwC, said: “July’s results continue to follow the downward trajectory of the index over the first half of the year. Smaller, privately owned contractors typically increased their financial leverage during the pandemic. However, with cash now very tight due to a period of rising interest rates, high material prices and increasing labour inflation, these businesses are feeling the impact of the current economic environment.

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“We are finding that our clients across the supply chain are most worried about how smaller, privately owned contractors are going to be able to manage through the current trading environment. Due to these circumstances, we are seeing suppliers reducing credit terms offered to contractors, which may be reflected in the lower levels of stock building reported in the July figures.”

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Max Jones, director in Lloyds Bank’s infrastructure and construction team, said: “While the data show a stronger-than-anticipated dip in output, there is still resilience and a sense of positivity among many contractors within the industry.

 “Larger firms hold strong balance sheets that are helping them to navigate rising interest rates and inflation, and while this is less so for smaller businesses, they are in a relatively healthy position, and can leverage capital management and cashflow tools to bolster that further when needed.

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 “A strong pipeline of public sector work means contractors can still plan with some confidence. However, they will also be conscious that under a new Prime Minister, government spending priorities could change with regards to infrastructure projects such as roads, hospitals, and schools. Whatever that decision is, clarity at the earliest opportunity will be what the sector wants; doubt helps nobody.

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“Rising material and labour costs, and liabilities for historical cladding projects, are major worries for contractors, yet insolvencies across the sector have remained low, which indicates a resilient sector and one that is performing relatively well.”

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Mark Robinson, chief executive of public sector procurement agency Scape, said: “July represents peak season for the construction sector, so a decline in industry activity undoubtedly serves as cause for concern. Looking ahead, it’s clear that the task of filling order books is becoming more challenging, with input costs continuing to increase and developers reviewing their plans if not putting them on hold.

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“Many contractors will be looking to the outcome of the Tory leadership race for a steer on future economic conditions – particularly in terms of public spending as community-focused investment continues to prove a catalyst for local growth. In the meantime, contractors will need to work diligently with clients to ensure projects continue to progress on time and to budget.”

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Fraser Johns, finance director of regional contractor Bear, said: “The largest fall in construction activity since February 2020 confirms the view that the next 18 months is likely to be slower for the sector.  However, there is also an element of market correction taking place as the pent-up demand following the pandemic begins to subside. This is probably why commercial work – which bucked the downward trend - is expanding at its weakest pace for 18 months.

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“The reduction in supplier delays is encouraging, the continued delays on some imported items from China and Europe remain a concern.

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“Skills shortages continue to be an issue for our sector. Recruitment of staff is a challenge for all industries. We are working hard to attract a diverse and inclusive workforce by offering incentives and opportunities for development at all levels, from apprenticeships to senior managers.”

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Construction buyers report first drop in output for 18 months

Industry buyers reported the first drop in construction output for one-and-a-half years in July.

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Commercial work saw the only increases as civils and housing falls dragged down the bellwether S&P Global/CIPS UK Construction Purchasing Managers’ Index to 48.9 in July from 52.6 in June.The index was below the crucial 50 no-change threshold for the first time since January 2021 and the rate of decline was the fastest since May 2020.

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Civil engineering was the worst-performing segment in July (index at 40.1), with business activity falling to the greatest extent since October 2020.

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House building declined for the second month running, but the rate of contraction was only slight (index at 49.4). Commercial work bucked the downturn seen elsewhere (52.3 in July), although growth was the weakest for 18 months.

Survey respondents commented on headwinds to client demand from rising inflation, fragile consumer confidence and higher interest rates.

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Purchase price inflation meanwhile eased considerably (index at 78.1, down from 85.8 in June), with the latest rise in cost burdens the least marked since March 2021. Construction firms noted upward pressure on business expenses from higher energy, fuel and transport costs, but this was partly offset by some easing in commodity prices (especially for metals and timber).

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Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said: “After several months of difficult conditions for builders, these challenges have now resulted in a contraction in construction with the biggest fall in activity since May 2020. “This disappointing result was felt across all the sectors, including housing which had demonstrated more resilience over the last couple of years, but fell for the second month in a row in July.

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“However, it was civil engineering that fell the hardest and furthest. With fewer new orders in the offing, it may be some time before we see a rebound in this sector bearing in mind the time lag of infrastructure projects.

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“Builders optimism remained at the lowest levels seen for two years. Job creation was healthy to complete work in hand but the danger remains that should the UK economy turn unfavourable, this will affect job hiring and the development of key skills.

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“A feather-like fall in prices may ease some of the pain as access to raw materials also improved, but prices at historically high levels will continue to hamper activity in 2023.”

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Construction Product Availability Statement - 27 July 2022

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

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With one or two exceptions, general product availability continues to improve across all categories and all regions, with the exception of Northern Ireland where separate issues are affecting the transport of goods.

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Very high levels of inflation exacerbated by the Ukraine conflict have stabilised. Softening demand, particularly at the retail end of the market, has led price inflation to moderate for some products, although this is unlikely to result in lower project costs in the short term. 

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The general view is that inflation will persist at a lower level across most product categories for the rest of the year.

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While many UK manufacturers purchase energy on forward contracts to help manage risk, the current extreme price volatility means that some firms are experiencing electricity cost fluctuating by up to 300% on a day-to-day basis, which may affect the financial viability of some energy-intensive manufacturing during the winter months.

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Recent weeks have seen improvements in the supply of aircrete blocks and bricks, in part due to a slight fall in demand. Summer maintenance programmes, however, may temporarily reduce production and reverse this trend as there remains a fine line between supply and shortfall due to continued strong sales of new houses.

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There are good stocks on the ground of structural softwood, carcassing and fencing in the UK and prices have reduced slightly as demand has dropped back. European and global demand remains firm, and with sanctions on Russian logs, prices are likely to remain at or near current levels.

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Delivery times for gas boilers remain an issue due to continuing high demand, and extended lead times are expected into Q1 2023. Availability and inflation, therefore, continues to disrupt the M&E supply chain.

Electrical wholesalers are reporting increased demand for solar PV and other renewable energy products, but also extended delivery times for these products. Wholesalers are also reporting longer delivery times for specialist lighting products.

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We have also received initial reports of a looming shortage of barrier pipe, used for all heating systems and hot and cold water supply, due to a shortage of a key manufacturing additive supplied from the USA.

There are fresh concerns over the availability and cost of imported glass later in the year, with European plants anticipating reduced production stemming from uneconomic energy costs.

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Transport issues continue to affect imported products; some major merchants suggest that only 25% of goods from the far east arriving on time. Container costs also remain at high levels, and reduced capacity on many shipping routes is likely to have the effect of sustaining high prices.

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Price inflation and the cost of living crisis are already affecting SME builders working primarily in private-housing Repair, Maintenance and Improvement. As consumers tighten their belts and become increasingly unwilling to enter contracts without a firm commitment to the end price, SME’s are experiencing a drop off in enquiries and contracts. A reduction in the volume of work will add to the pressures faced by SME businesses.

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While house builders and larger contractors have not yet been affected to the same extent, they share the entire market’s concerns over rising energy costs and interest rates, and tight labour availability. Recruitment is an issue in all areas, with competition for drivers, sales and front of house staff coming from other industries as well as between firms in the sector.

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Given that supply chains in construction are continuing to forecast rising costs, the challenge of quantifying and managing these cost rises will increasingly necessitate the wider use of appropriate contractual mechanisms (such as index-linked, cost-plus, provisional sum, etc).

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How is Travis and Toolstation doing?

Tool station owner Travis Perkins is focusing on strengthening its trade customer relationships by offering convenient service through both physical and digital channels. This comes at a time when DIY shoppers are spending less with it in the wake of the pandemic.  The builders merchant business says that its trade business is growing strongly, but that the high levels of DIY sales that it saw during last year’s pandemic lockdown, particularly at Tool station, has since subsided. It says that rising energy costs are now the main driver of product inflation – running at 15.3% – since supply chain and stock issues are now generally back to normal.

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The update came as Travis Perkins reported revenues of £2.5bn in the six months to June 30. That’s 10.3% higher than the same period last year. Like-for-like sales were 7.9% up on last year – but lower than the 44.1% LFL growth that it reported a year earlier. But pre-tax profits of £136.6m were down by 6.2% on £145.7m a year earlier. 

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Merchanting sales grew by 13.3% to £2.2bn, with LFL sales growth of 11.7%. That’s behind the 47.3% LFL growth of a year earlier. Its general merchant business saw sales grew by 12.2% while its specialist businesses – which account for 40% of its merchanting business and include Keyline, BSS and CCF – saw sales grow at 15.1%. 

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However, price inflation, running at 15.3% throughout the half-year, was a larger part of that sales growth than originally expected. “Whilst in the first half of 2021 inflation was driven by product shortages, supply chains and stock levels have largely normalised and the current wave of inflation is predominantly driven by rising energy costs being passed through from manufacturers,” Travis Perkins said in today’s figures. Adjusted operating profit in its merchanting businesses came in at £170m, up by 9% on the £156m it reported last year. 

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Toolstation sales fell by 4.6% to £376m, with LFL sales 10.6% behind last year, when they had grown by 29.8%, as DIY sales reduced in the wake of the pandemic. A year earlier, DIY sales had peaked during lockdown. It reported an operating loss of £8m – down from an adjusted operating profit of £10m last time – following investment in new branch openings in both the UK (+19 to 549) and Europe (+20 to 143). In the UK alone, it reported an adjusted operating profit of £7m, 65% down from £20m last time, while in Europe it reported a £15m loss that are expected to widen to £30m in the full-year. 

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Travis Perkins chief executive Nick Roberts says that while its trade-focused builders’ merchant businesses performed well during the first half, Toolstation had returned to primarily serving trade customers in the wake of the pandemic. “We remain as confident as ever in the long-term growth potential of the business and in our UK investment programme, whilst also increasing investment in Toolstation Europe to take advantage of the opportunities we see in those markets.

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“Whilst we are cognisant of the current macroeconomic uncertainty, our diverse end market exposure, broad trade customer base and strong balance sheet provide resilience against changes in market conditions. The strong performance of our Merchant businesses is set to continue into the second half, driven by our agility in managing inflation and by our leading service propositions. 

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This will be offset by a combination of the normalisation of Toolstation’s customer base and the increased investment in the Toolstation growth opportunity in the UK and Europe. As a result, we expect the group overall to deliver a full year performance broadly in line with market expectations.”

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Toolstation multichannel strategy

The focus for Toolstation is now on using convenient service, both in-store and via digital, to build relationships with its core trade customers. That convenient service is focused on ordering, fulfilment, payment and stock availability. In the last two years the retailer has opened a net 140 new branches in the UK with 20 opened in the first half. It expects to open a similar number in the second half as it works towards a medium-term target of 650 branches. 

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Latest Government Construction Industry Reports

Short-term measures of output in the construction industry.

1.Main points

• Monthly construction output increased by 1.5% in volume terms in May 2022; this is the seventh consecutive monthly growth following the upwardly revised increase to 0.3% in April 2022; May 2022 is a record high in monthly-level terms (£15,053 million) since records began in January 2010.
• The increase in monthly construction output in May 2022 came solely from an increase in new work (2.8%) as repair and maintenance saw a slight decline, decreasing 0.4% on the month.
• At the sector level, the main contributors to the increase seen in May 2022 were private commercial new work and private new housing, which increased by 12.1% and 7.2% respectively.
• The level of construction output in May 2022 was 4.1% (£598 million) above the February 2020 pre-coronavirus (COVID-19) pandemic level; new work was slightly below (£3 million) the February 2020 level, while repair and maintenance work was above (£601 million) the February 2020 level.
• The recovery to date, since the falls at the start of the coronavirus pandemic, is mixed at a sector level, with infrastructure 19.0% (£356 million) above and private commercial 21.2% (£524 million) below their respective February 2020 levels in May 2022.
• Alongside the monthly increase, construction output increased by 3.0% in the three months to May 2022, with increases seen in both new work, and repair and maintenance (2.4% and 4.1% respectively); this is the seventh consecutive growth in the three-month on three-month series, and the largest growth seen since June 2021 (4.0%).
• Revisions in this release are seen back to January 2022 and are consistent with the GDP quarterly national accounts, UK: January to March 2022 bulletin, published on 30 June 2022

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2.Construction output in May 2022

Monthly construction output increased by 1.5% in volume terms in May 2022. This is the seventh consecutive monthly growth following the upwardly revised increase (0.7 percentage points) to 0.3% in April 2022. May 2022 is a record high in terms of monthly levels (£15,053 million), since records began in January 2010.

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Anecdotal evidence from both returns received for the Monthly Business Survey for Construction and allied trades and the Business Insights and Conditions Survey (BICS) dataset highlights the continual issues in sourcing certain construction products. High costs for products such as concrete, bricks and timber are still mentioned. There are also ongoing shortages of many materials, particularly for the smaller sized firms. Also, significant mentions of higher fuel costs and VAT tax increases for red diesel have had an impact this month.

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Despite these challenges, order books continued to remain strong, as shown in the recent Quarter 1 (Jan to Mar) 2022 New orders in the construction industry dataset. In Quarter 1 2022, total new orders were 13.7% above their Quarter 4 (Oct to Dec) 2019 level. This was the last full quarter not affected by coronavirus, and all six sectors were above their pre-coronavirus level in Quarter 1 2022.

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Detailed growth rates

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Private industrial new work has seen growth in May 2022 and continues to be strong when compared with measures in the previous year. This has come from a rise in warehouses and distribution centres. This is shown further in the new orders data, with warehouses showing an increase that is likely linked to the change in consumers' shopping habits over the coronavirus pandemic. Specifically, this is because of more online spending.

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Month-on-month construction output growth in May 2022

The 1.5% rise in construction output in May 2022 represents an increase of £229 million in monetary terms compared with April 2022. Four out of the nine sectors saw an increase.

Private housing new work and private commercial new work were the largest contributions to the monthly increase in May 2022, increasing by 7.2% (£235 million) and 12.1% (£211 million) respectively. The increase seen in private commercial new work comes after a large monthly decrease of 7.0% in April 2022.

Continued anecdotal evidence from businesses that has been gathered over recent months suggests that the increase in private commercial comes from a rise in offices. This is further shown in the new orders data (up 38% in Quarter 1 2022), which is probably linked to office space refurbishments increasing, as employees have been returning to offices.

The increase in turnover is also backed by the latest data from the BICS in the latest waves for construction firms. For the period 1 March 2022 to 31 May 2022, businesses were asked how their turnover in the current month compares with the previous calendar month. There was a rise in the proportion of firms reporting an increase in May 2022 (up to 11% from 8%).

Three-month on three-month construction output growth in May 2022

Construction output rose by 3.0% (£1,307 million) in the three months to May 2022. This is the seventh consecutive increase in the three-month on three-month series. Increases in both new work, and repair and maintenance (2.4% and 4.1% respectively) contributed to the growth, with seven out of the nine sectors seeing an increase.

All repair and maintenance sectors have shown positive growth in the three months to May 2022. As this covers the months March to May 2022, anecdotal evidence gathered over March 2022 suggests that the increase in the repair and maintenance sectors was because businesses had a higher workload in March 2022. This was because of the repair work derived from the storms seen in late February 2022. In these data, February 2022 moves into the comparison period for the first time.

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3.Revisions to construction output in May 2022

Estimates in this bulletin are consistent with our GDP quarterly national accounts, UK: January to March 2022 bulletin, published on 30 June 2022. Revisions are seen back to January 2022.

Quarter 1 (Jan to Mar) 2022 is revised to have now grown by 2.2% with a downward revision of 1.6 percentage points. January 2022, which has now increased by 0.5% (down 1.6 percentage points), is the main contributor to the fall in the quarter. This revision is coming from late and revised survey data, which is partly on account of the lower response levels seen in early estimates.

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Builders’ merchant sales bounce back in May

The latest figures from the May Builders Merchant Building Index (BMBI) report reveal a sharp rise in sales as lockdown restrictions ease and trades return to work.

Year-on-year, Total Builders Merchants value sales in May were down -39.9% compared with May 2019, reflecting the cautious reopening of merchant branches with many still operating a restricted service. However, the overall trading figures are a significant improvement on April 2020 sales (-76.3%).

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A closer look at how individual product categories performed in May reveals that year-on-year, Tools (-66.1%) and Kitchens & Bathrooms (-62.7%) have been hit hardest by the pandemic lockdown. Timber & Joinery Products were also down by 40.5% over the same period, however month-on-month, the category is showing some green shoots of recovery with sales more than tripling compared to April 2020 (+199.5%). Heavy Building Materials, the largest product category, was down 39.0% year-on-year but showed a substantial month-on-month improvement on April 2020 (+157.6%).

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The biggest winner in May was Landscaping, with sales of this seasonal category down just -12.5% on May 2019. This is a remarkable recovery from April, when sales were down a massive -74.4% compared to April 2019. Workwear & Safety wear was less affected by the lockdown, with demand for PPE continuing to drive sales.

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The BMBI is a brand of the Builders’ Merchants Federation, developed and produced by MRA Marketing. The Index uses GfK’s Builders Merchant Point of Sale Tracking Data which analyses sales out data from over 80% of generalist builders’ merchants’ sales across Great Britain, making it the most reliable source of data for the sector.

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BMF CEO John Newcomb comments: “As expected, May’s sales figures show a huge year-on-year decline, but they also indicate the strength of the initial bounce-back from April’s COVID-19 crash low-point. The massive effort by the entire supply chain to develop and implement COVID-secure working practices to enable the safe and rapid re-opening of manufacturing facilities, merchant branches and construction sites can be seen in May’s results. There is a long way to go on the road to recovery, but we can look on this as a positive first step.”

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Emile van der Ryst, Senior Client Insight Manager – Trade at GfK adds: “The Builders Merchants sector has seen a strong and expected recovery from April’s lockdown as the core categories of Heavy Building Materials, Timber & Joinery and Landscaping drive market activity. May growth is still down by -40% from last year, with the next couple of months critical. Favourable weather conditions and relaxed restrictions will hopefully provide the platform for these core categories to recover some of the losses seen during lockdown.”

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Weakest rise in UK private sector business activity for 17 months. Input cost inflation slows during July

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 S&P Global / CIPS Flash UK Composite Output Index registered 52.8 in July, down from 53.7 in June and the lowest reading since February 2021

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• Flash UK PMI Composite Output Index(1) at 52.8 (Jun: 53.7). 17-month low

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• Flash UK Services PMI Business Activity Index(2) at 53.3 (Jun: 54.3). 17-month low.

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• Flash UK Manufacturing Output Index(3) at 49.7 (Jun: 50.3). 26-month low.

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• Flash UK Manufacturing PMI(4) at 52.2 (Jun: 52.8). 25-month low.

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Business activity at UK private sector companies increased for the seventeenth month running in July, but the rate of expansion was the weakest over this period. The slowdown in output growth mostly reflected softer demand, alongside ongoing capacity constraints arising from shortages of materials and staff.

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On a more positive note, latest data indicated that input cost inflation eased considerably since June and was the lowest for ten months. Survey respondents often commented on lower commodity prices and a stabilisation in fuel costs, but there were still widespread reports citing intense salary pressures. Some firms noted that exchange rate depreciation against the US dollar had added to their purchasing costs during July.

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The headline seasonally adjusted S&P Global / CIPS Flash UK Composite Output Index registered 52.8 in July, down from 53.7 in June and the lowest reading since February 2021. Any figure above 50.0 indicates an overall expansion of private sector business activity.

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Sector data illustrated that service providers continued to outperform in July (index at 53.3), although the latest output expansion was the weakest for 17 months. Meanwhile, manufacturing production (49.7) decreased for the first time since May 2020. Goods producers typically cited a lack of new work to replace completed orders, reflecting subdued client confidence and weaker global economic conditions.

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New order volumes across the UK private sector as a whole increased moderately in July, driven by a sustained rise in new work across the service economy. A number of firms attributed higher workloads to resilient consumer spending on travel and leisure services. In contrast, manufacturing companies signalled a further reduction in sales volumes and the rate of decline was the fastest for just over two years. Weaker demand led to the steepest drop in backlogs of work at manufacturing firms since June 2020.

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July data indicated a solid rise in private sector employment, despite the pace of job creation easing to a 16-month low. Higher levels of employment were driven by efforts to reduce backlogs and rebuild business capacity after cutbacks during the pandemic. However, some firms reported that shortages of candidates and concerns about the demand outlook had led to the non-replacement of leavers.

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Input cost inflation moderated for the second month running, with the seasonally adjusted index dropping from 84.5 in June to 78.3 in July. This signalled the slowest rate of inflation since September 2021. Manufacturers recorded a particularly marked easing in cost pressures, with this index reaching its lowest for 18 months. Survey respondents suggested that lower commodity prices had started to alleviate pressures on raw material costs (especially metals). Service providers mostly noted that intense wage pressures due to shortages of staff and rising consumer price inflation had continued to push up their cost burdens.

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Mirroring the trend for input costs, July data pointed to a further slowdown in prices charged inflation at private sector companies. The latest rise in output charges was the least marked since January, reflecting some efforts to moderate price increases in the wake of softer customer demand.

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Looking ahead, private sector firms remain relatively cautious about the business outlook, despite a slight improvement from June's 25-month low amid stronger optimism in the service economy. 

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Some service sector firms commented on hopes of only a brief slowdown in client demand and a longer-term boost from COVID-19 recovery and improving supply capacity. However, manufacturing companies indicated that business optimism eased to a 26- month low in July, with the gloomy global economic outlook and subdued new order books contributing to weaker projections for output during the year ahead. Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said: "UK economic growth slowed to a crawl in July, registering the slowest expansion since the lockdowns of early-2021. Although not yet in decline, with pent-up demand for vehicles and consumer-oriented services such as travel and tourism helping to sustain growth in July, the PMI is now at a level consistent with just 0.2% GDP growth. 

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Forward-looking indicators suggest worse is to come. Manufacturing order books are now deteriorating for the first time in one and a half years as inflows of new work are insufficient to keep workforces busy, which is usually a precursor to output and jobs being cut in coming months.

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Raw material buying has already slumped and hiring has slowed as companies reassess their requirements for the coming months in the face of worsening demand conditions.

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"The concern is that rising interest rates, as the Bank of England seeks to control inflation, will cause demand growth to weaken further in the coming months. To be hiking interest rates at a time of such weak business growth is unprecedented over the past quarter-century of survey history.

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"On a brighter note, inflationary pressures have cooled markedly, stemming from fewer supply shortages and more discounting in response to the weakened demand environment. Companies' costs are growing at the slowest rate since last September, which should help alleviate some of the upward pressures on inflation from energy and food in the coming months."

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Duncan Brock, Group Director at CIPS, said:

"Private sector firms left little to get excited about in July with the softest rise in activity since February 2021 but there was a scrap of improvement in some areas that offered light relief. The rise in input costs was the lowest since September 2021 with a slight stabilisation in fuel costs and some commodity prices had started to drop.

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"This will be scant comfort for manufacturers who saw their output drop into contraction for the first time since May 2020. Clients reduced spending as recessionary fears were high on the list, and concerns over higher manufacturing wage bills to tempt suitable staff affected business costs. Service providers were top of the leader board even with the weakest growth for almost 18 months as consumer spending on holidays remained elevated. 

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This may be a fleeting moment in 2022 before higher energy costs kick in during the autumn months and cost of living concerns surface again."There was a slight improvement in future business optimism but it remained lower than the survey average. Firms were painfully conscious of the weaknesses in the UK and global economies and were not hopeful they would experience the same boost in momentum compared to earlier in the year."

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