Construction PMI: Construction activity reaches two-year high despite funding challenges

According to the latest PMI data by S&P and CIPS, the headline construction PMI for May rose slightly to 54.7, up from 53 in April and continuing the upward trend for the third consecutive month, and the highest level of activity since June 2022. 

The latest uptick was driven by increases to housing activity and commercial activity, which jumped to 50.4 and 55.9. Future activity also saw growth for the third consecutive month, rising to 71.5. Input prices also fell in May to 50.4, as new orders saw an uplift to 53.8.

Kelly Boorman, national head of construction at RSM UK, said: ‘The uptick in the headline construction PMI to 54.7 in May reflects industry optimism as businesses are reporting that their pipelines remain strong, with margins also improving. This is the highest level of activity in two years, most likely driven by inward investment from pension funds to stimulate the housing market. In addition, the increase in future activity for the third consecutive month is also a positive indicator for Q3 and Q4, especially as inflation continues to fall. Input prices also fell to 50.4, which given the uptick in new orders to 53.8, is another strong sign that activity is moving in the right direction despite last month’s national minimum wage increase. The uplifts in housing and commercial activity are also to be expected, as previously stalled projects continue to materialise, and businesses acquire new office space suitable for hybrid working. 

‘Despite strong pipelines, mobilisation of projects continues to be an issue, creating challenges for the supply chain managing working capital needs and sources labour. With a general election looming next month, this could also dampen business confidence slightly, without impacting pipelines. Businesses will be eager to understand where political parties intend to allocate budget across infrastructure, housebuilding and commercial projects, as access to and availability of funding remains a major challenge. Businesses need working capital to deliver projects, therefore it is essential the next government understands the industry’s working cycles and how projects are funded to protect the supply chain and ensure businesses can deliver increased housing volumes and infrastructure projects.’

She added: ‘Many contractors are also calling for a new financing model to replace the existing PFI to boost private investment in infrastructure. Although planning reform may be a pipe dream, the next government should focus on accelerating the planning process, to support delivery of housing targets, adoption of greener and more efficient building processes, and incentivise businesses to adopt new technology.’

Thomas Pugh, economist at RSM UK, added: ‘The rise in S&P/CIPS construction PMI suggests that the construction industry is continuing to recover after a two year period of protracted weakness. 
Just as importantly, the drop in input price inflation to 50.4, suggests that press pressures are easing across the whole economy, not just one particular sector. That is good news for the prospects of interest rates cuts later in the summer.

‘The increase in the housing activity index is good news for an economy desperately crying out for more homes and probably reflects increasing activity in the housing market as incomes rise and interest rate cuts appear on the horizon. We continue to expect the housing market to recover as real incomes rise and the Bank of England starts cutting interest rates from August.

‘The key news for the MPC was that the input prices index of the construction PMI dropped to 50.4, well below its five-year average of 66.2. The takeaway from this is that April’s sticky inflation numbers were probably a direct response to the increase in the minimum wage, rather than a reflection of underlying price pressures. Price pressures are now easing across the economy.

‘Overall, the PMIs paint a picture of a recovering economy. It will probably not be until the second half of the year when growth picks up sharply. Lower inflation, falling interest rates and tax cuts should kickstart consumer spending, which should then flow through to an improvement in business confidence and the rest of the economy.’