Brexit weighs heavily on construction

The UK construction sector has experienced a loss of momentum, with business activity growth easing to its weakest for ten months, according to the latest IHS Markit/Cips UK Construction Total Activity Index.

New orders increased only marginally at the start of 2019, which contributed to the slowest expansion of employment numbers for two-and- a-half years. A number of survey respondents noted that Brexit uncertainty had led to hesitancy among clients and a corresponding slowdown in progress on new projects.

The index dropped to 50.6 in January, from 52.8 in December. The index has posted above the 50.0 no-change mark in each month since the snow-related decline seen in March 2018, but the latest expansion was the weakest seen over this ten-month period of growth.

Brian Berry, chief executive of the Federation of Master Builders (FMB), said: “Political uncertainty is the enemy of construction firms that rely on the spending power of homeowners to commission home improvement projects. The UK is set to leave the EU … and yet we are still none the wiser about what the future holds. Given these intense headwinds, it should not be surprising that the sector suffered such a sharp decline.”

All three categories of construction output recorded weaker trends than those reported in December. Residential work was the strongest performing area, although the latest expansion was only modest and the slowest seen since March 2018. Civil engineering activity increased marginally, with the rate of growth much softer than December’s 19-month high.

Commercial work was the weakest performing area of construction output in January. Latest data indicated a decline in work on commercial construction projects for the first time in ten months. Anecdotal evidence suggested that Brexit-related anxiety and associated concerns about the domestic economic outlook continued to weigh on client demand.

New business growth eased to an eight-month low in January. Construction firms widely commented on softer demand conditions and longer sales conversion times, reflecting a wait-and-see approach to spending by clients. Concerns about the near-term outlook for new projects resulted in more cautious staff hiring policies at the start of 2019. The latest survey pointed to the slowest rise in employment numbers since July 2016.

Meanwhile, slower growth of input buying helped to reduce pressure on construction supply chains in January. The latest deterioration in vendor performance was the joint-weakest since September 2016. Construction firms also pointed to the smallest reduction in sub-contractor availability for two-and- a-half years.

Input price inflation continued to moderate in January, with average cost burdens rising at the slowest pace since June 2016. Where an increase in purchasing costs was reported, this was generally linked to rising prices for imported construction products and materials.

However, construction firms remain positive about the outlook for business activity in 2019. Around 41% of the survey panel anticipate a rise in output, while only 16% forecast a fall.

While the FMB’s latest State of Trade Survey showed that workloads for construction SMEs grew in Q4 2018, there are serious concerns about the mounting problems facing small building firms, including:

  • 42% of builders have detected signs of a weakening housing market
  • one in five construction SMEs have had projects stalled in the past three months due to delays to loans, or loan refusals, from the banks
  • carpenters overtake bricklayers as the trade in shortest supply with nearly two-thirds (64%) of construction SMEs struggling to hire carpenters and joiners and 61% struggling to hire bricklayers
  • looking ahead, expectations for the future weakened for the third consecutive quarter, with just one third (33%) of construction SMEs anticipating higher workloads in Q1 2019 – this is down from 36% in the previous quarter
  • 87% of builders anticipate that material prices will rise further in the next six months, slightly up from 86% in Q3 2018
  • two-thirds (66%) of construction SMEs expect wages and salaries to increase over the next six months, up from 58% in the previous quarter.

“Mounting Brexit uncertainty is starting to have a tangible effect and the indicators are not good with almost half of builders reporting signs of a weakening housing market,” Brian said. “Furthermore, a worrying one in five construction SMEs has had projects stalled in the past three months due to delays to loans, or loan refusals, from the banks. Together with ever-rising costs due to material price hikes and labour shortages, the headwinds are blowing in the wrong direction for the UK construction sector.”