UK construction firms report worst optimism since September 2020 after sharp rise in costs
- The S&P Global / CIPS Construction PMI poll showed 58.2 in April
- Giant infrastructure projects such as HS2 have increased activity in civil engineering
- Rising prices for fuel, energy and raw materials have led to worsening costs
Sentiment among UK construction firms reached its weakest level in almost two years as inflationary pressures intensified, although business activity remained strong, according to new data.
The latest S&P Global / CIPS survey on the Construction Purchasing Managers Index found 58.2 in April, compared with 59.1 in March, the 15th consecutive month of growth in the sector.
All three major industry segments have reported expansion, with commercial work supported by Covid-19 recovery cost plans and giant infrastructure projects, including the High Speed 2 rail line, which is boosting the civil engineering industry.
Expansion: The latest S&P Global / CIPS survey on the Construction Procurement Managers Index (PMI) showed 58.2 in April compared to 59.1 in March
But business optimism has fallen to its lowest level since September 2020 as companies reported that rising fuel, energy and raw material prices have led to much greater cost burdens.
A barrel of Brent oil remained above $ 100 for most of April after falling in the early stages of the Covid-19 pandemic, when governments around the world imposed tough travel restrictions.
Meanwhile, gas prices remained very high due to significant demand in Asia, weak storage levels after the cold winter of 2020/21. and weak winds in Europe last summer, among other factors.
These costs have been exacerbated by Russia’s full-scale invasion of Ukraine, as well as serious supply chain problems such as delivery delays and shortages of workers, transportation and materials.
About 45 percent of construction firms surveyed said they were affected by longer lead times, compared with only 2 percent who saw improvement.
Tim Moore, S&P Global’s director of economics, said: “The construction sector is moving towards a more subdued recovery phase as energy costs rise sharply and raw materials hit customers’ budgets.”
The rate is rising: construction activity was in some cases stopped as a result of rising borrowing costs after a series of interest rate hikes by the Bank of England
However, despite the fact that the industry is experiencing significant headwinds, many more companies believe that they expect growth in activity in the next 12 months than a decline, and employment in construction continues to grow.
Moore added that construction firms have developed “strong order books since the UK’s economic recovery” that should continue to expand the industry during the second quarter.
In addition, the April PMI of 58.2 is only the lowest figure since January and slightly higher than the average figure predicted by economists in a Reuters poll. Any number above 50 indicates an extension.
However, construction activity in some cases came to a halt as a result of rising borrowing costs following a gradual rise in interest rates by the Bank of England in response to inflation in the UK, which soared to its highest rate in three decades.
Since December, the UK central bank has raised the base rate from a record low of 0.1 per cent to 1 per cent, although it is unknown whether there will be a further increase this year due to fears that the UK economy could fall into recession.
Kelly Burman, a partner at business consulting firm RSM UK, said: “The Bank of England has raised interest rates to the highest level in 13 years combined with a wider existing pressure melting pot. [construction] the industry cannot continue to absorb the high costs of introduction.
“Therefore, we can expect that an increasing number of companies in the construction sector are facing acute financial problems.”