Industry remains bullish despite slowing growth in September

The construction industry remains optimistic about the future despite current shortages of materials and personnel that slowed the recovery in September.

The latest monthly PMI survey found that production growth has slowed for the third month in a row, subcontractor fees have risen at an all-time high, and widespread supply shortages are driving cost inflation rapidly. .

Data for September showed a further slowdown in growth in the construction sector, with production volumes increasing as little as possible in the past eight months. Respondents to the survey also cited disruption at the site due to unavailability of transport, a severe shortage of materials and persistent staff shortages.

A rapid decline in the availability of subcontractors was reported in September. The imbalance of supply and demand contributed to the largest increase in subcontracting costs since the start of the survey in April 1997.

At 52.6 in September, against 55.2 in August, the seasonally adjusted IHS Markit / CIPS UK Construction PMI® total activity index is still lower than the 24-year high recorded in June (66.3) . The latest reading signaled only a moderate expansion in total construction output and the slowest speed of recovery in eight months.

The three main categories of construction activity experienced a loss of dynamism in September, with the biggest slowdown observed in civil engineering (51.0, against 54.8 in August).

Housing construction also slowed in September, with the latest expansion being the smallest since the recovery started in June 2020 (52.8). This left the commercial segment (53.6) as the top performing category in September.

Construction companies saw a moderate increase in new work during the month of September, with the growth rate decelerating sharply to its weakest since early 2021. The slowdown is linked to customer reluctance and conditions less favorable demand.

The lack of availability of subcontractors added to the squeeze in labor supply in September. The shortage of subcontractors has also resulted in additional cost pressures, with rates charged for subcontracted work increasing at an all-time high.

Purchase prices rose rapidly in September, although the inflation rate slowed further from the historic high in June. About 78% of the survey panel reported an increase in their financial burdens, which was mainly related to supply shortages and transport overloads.

At the same time, the latest survey showed that construction companies remain very optimistic about the business outlook. Just over half (51%) predict an increase in production, while only 8% foresee a decrease. However, confidence was lower than in August, with some fearing the supply chain crisis could hamper growth.

Tim Moore, director of IHS Markit, which compiles the survey, said: “Data for September highlighted a serious slowdown for the construction industry as labor shortages and Supply chain crises combined to disrupt activity at the site. The volatile price and supply environment began to hamper new business taking as construction companies revised their forecasts costs and some customers have delayed contract award decisions. As a result, the latest survey data indicated the worst month for order books since the January lockdown.

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: “The construction business suffered another setback in September, with builders hit by staff and material shortages, delivery delays and delays. higher trade costs as this phase of the post-pandemic recovery has become the most fragile in eight months. Unless supply chain performance is bolstered with headcount, we are heading into a stagnant fall as the sector is certainly not on a level playing field at the moment. “

Matthew Farrow, policy director at the Association for Consultancy and Engineering (ACE), said: “Fall is here and the numbers haven’t improved significantly. As in many other industries, we face the specter of rising costs for people as well as delays and inflationary pressures on materials. This is a powerful combination that will hold back post-pandemic recovery both in the construction sector and in the economy at large. Despite these challenges, the fact that respondents remain largely optimistic with a positive business outlook is welcome news. It remains to be seen whether this will hold up for the next few months of 2021, which will likely not see any substantial change in the circumstances under which we work. “

Mark Robinson, Managing Director of SCAPE Group, specializing in public procurement, said spending on public sector projects will be essential to maintain industry confidence and generate economic growth. He said: “The winter months are likely to be tough for the construction industry, despite these latest numbers and the renewed focus on the government’s ‘Build Back Better’ ambitions this week. Public sector spending will continue to play an important role in maintaining confidence and setting standards for risk management throughout the supply chain if inflationary pressures persist. In addition to rigorous scenario planning through procurement, developers – public and private – will need to encourage open dialogue and prompt payment practices to support the health of our supply chains, which will ultimately be the engine. of any growth this winter. “

Jan Crosby, Head of Infrastructure, Building and Construction at KPMG UK, said: “Global supply chain delays, truck driver shortages and fuel demand are wreaking havoc here for the fuel industry. construction in the UK, which must overcome these challenges along with the management of pent up the pressure for builds.

“While some companies have been nimble enough to handle these issues by stocking or expanding their supply network, others have understandably struggled, leading to projects being canceled or delayed. This is why another month of slow growth is to be expected given the circumstances. The sector is in desperate need of rebalancing. But for now, the industry is responding impressively to these complicated conditions. “

Max Jones, director of Lloyds Bank’s infrastructure and construction team, said the coming months will be a test of which contractors have been managed well throughout the pandemic as they adjust to life without government support, especially as material shortages set in.

“What will become clear as the end of the year approaches is the quality of how companies run throughout the pandemic and which ones are best placed to face the headwinds that will affect the world. economy at large and will reap the rewards of continued high demand, ”he added. Jones said. “Labor, energy and material shortages are straining entrepreneurs. Taken individually, the industry would be well equipped to handle these supply issues, but collectively they threaten to slow the recovery, just as businesses should aim for growth. The industry is also facing a skills gap. For now, entrepreneurs are covering the cracks by paying more to recruit and retain skilled workers to ensure projects stay on track, but the concern is that this could create a long-term wage inflation problem. for industry. “

Modular housing specialists TopHat and Etopia were among those who highlighted the urgent need for the construction industry to adopt modern construction methods as part of a successful post-Covid green recovery.

Andrew Shepherd, Managing Director of TopHat Solutions, said: “Inflationary price hikes, caused by a severe shortage of materials, mean that there is an urgent need to revisit the way the industry sources and manages supply chains. supply if the UK is to build better and meet government housing targets. With off-site manufacturing, companies like ours can provide our supply chain partners with greater certainty on orders, as our plant’s production line must be constantly fed. By being more predictable and forward-looking, modular home builders will be able to offer partners the certainty of growing and investing. “

Joseph Daniels, CEO and founder of modular housing and technology company Etopia Group, and also an independent advisor to the government on decarbonizing the construction sector, said: “As the global economy recovers, there are tremendous pressures on the supply chain are to be expected. Tighter supply chains mean the UK construction industry must now think about how it uses and disposes of waste. amount of materials required for each construction. Much like car manufacturing, MMC uses standardized processes, so every home that is created in factories like ours uses exactly the same amount of materials. Technology will help achieve such efficiencies – it’s time to build the embrace. “

PMI data was collected between September 13 and September 29, 2021.

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