Construction industry needs financial support from new PM as business confidence plummets

According to the latest PMI data by IHS Markit and CIPS, the headline construction PMI rose slightly to 49.2 in August 2022, up from 48.9 in July, which saw the first rebound since February.

However, the slight rise in August reflects civil engineering activity increasing to 45.5 from 40.1, following a sharp fall in July 2022. Most other measures of activity in the survey dropped further in August. The knock-on impact of soaring energy prices and inflation are expected to cause major disruption to construction output over the coming months.

Kelly Boorman, partner and national head of construction at RSM UK, said: ‘The Construction PMI for August 2022 saw a slight rise in the headline index, following retraction in the market in July 2022. However, this slight increase is due to an uptick in civil engineering activity in August 2022, which has been very volatile over the last few months. In contrast, new orders fell to 50.5 from 53.8, highlighting how the pipeline of activity in Q3 2022 is slowing as the backlog of work brought about by the pandemic comes to a close. This, coupled with soaring energy prices and government infrastructure projects being paused, is crippling industry confidence in future output.

‘However, August shows some positive signs for the sector, as supplier delivery times have risen from 44.1 to 44.8. This indicates that recent supply chain disruption is improving, and businesses are receiving the raw materials they need on time, alleviating pressures to deliver projects within expected timeframes. While this shows that supply chain conditions are easing, this may also be due to a drop in demand.’

She added: ‘Future activity also fell in August from 63.5 to 60.6, showing that headwinds remain for the sector, with businesses concerned about the future prospect of contracts, especially as the retendering of projects is becoming an increasingly less viable option. The availability of subcontractors also fell to 39.0, while the employment index also decreased to 53.7, suggesting that the industry could be in for further challenges in terms of labour shortages.

‘Following yesterday’s government announcement that Liz Truss will become the next prime minister, the construction industry will be eagerly awaiting to see whether or not her plans to address the energy crisis with extended business rates relief will come into fruition. More specifically for the construction sector, a targeted approach to provide financial support for energy intensive businesses could help prevent an increasing number of contractors entering administration in Q4 2022.’

Thomas Pugh, economist at RSM UK, said: ‘Today’s data suggests the construction sector may already be in a recession, ahead of the rest of the economy. As a much more intensive consumer of energy, the construction sector has been hit even harder by the huge run up in energy prices over the last month. This will inevitably lead to reductions in output as particularly energy intensive firms cease production and once viable firms face becoming loss-making.

‘At the same time, the construction sector is facing a drop in demand as households’ and businesses’ spending power is squeezed by the same surge in energy prices. That said, if the government offers a substantial support package for households and businesses through the winter, then the worst of the coming recession can be avoided. Indeed, we think this recession will be one of the smaller ones on record with a peak-to-trough drop in GDP of between 1 and 2%. That compares to a drop of 6% in the financial crisis and over 20% during the pandemic!’