Construction PMI falls below 40 amid industry concerns around price increases and Middle East impact says RSM UK
Today’s PMI data by S&P and CIPS showed a significant decline in the headline construction PMI for April, with the figure dropping below 40 to 39.7 from 45.6 in March, as the sector shows significant concern over further price increases and uncertainty around the impact of the Middle East conflict.
Civil engineering saw the steepest decline to 35.3 from 44.8 in March, while housebuilding remained below the 40 mark for a sixth consecutive month at 38.2.
Kelly Boorman, national head of construction at leading audit, tax and consulting firm RSM UK said: “Today’s figures show sentiment in the sector has fallen significantly as the industry braces for the impact of the Middle East conflict. Mobilisation is slowing as UK construction faced cost pressures on slim margins further challenged by the weakening economic backdrop.
“Pipelines are currently strong, particularly for large infrastructure projects including defence, healthcare and data centres. There are however some significant challenges around reassessing the viability of projects and extending mobilisation start dates, as oil price increases hit the supply chain, increasing material and fuel costs.
“With the increased volume of infrastructure projects committed to in prior years, outputs remain strong. However, local elections this week could cause further uncertainty among contractors around where future infrastructure spending will be focused. Uncertainty around planning decisions and concerns around new work to replace completed projects in April could create a shrinkage in the pipeline in the future that will create further instability for the industry. There is a significant risk that some planned projects will become unviable in the current economic climate, particularly for long-term fixed price projects, so we may see some large infrastructure projects put on hold.
“Supply chains remain volatile, with pressure of working capital and uncertainty around mobilisation dates, access to affordable debt and stalls in projects could cause insolvencies to spike in the coming months.
“Housing has seen a decline to 38.2 and with the reduction of mortgage products available and the anticipated interest rate rise, we expect the housing market to be impacted significantly over the coming months.”
Thomas Pugh, chief economist at RSM UK added: “The heavy reliance of the construction industry on diesel and energy intensive inputs means it’s one of the industries most affected by the surge in fuel and energy prices. Indeed, the input prices balance jumped up in April. Unless firms are able to pass on increased costs, the viability of some projects will be threatened, leading to weaker growth.
”At the same time, there will be a hit to some areas of demand. Admittedly, government backed projects and some commercial builds are relatively price insensitive and will continue. But it’s difficult to see how the resilience of the housing market in the first two months of the war lasts, given the jump in mortgage rates and inevitable hit to real disposable incomes and employment. A slowdown in the housing market will particularly impact housebuilders.
“Of course, if a final deal between the US and Iran does turn out to be close and energy prices continue to fall back, then the worst of the economic damage may be mitigated, and the Bank of England may be able to hold interest rates steady, rather than raising them. But some increase in costs and a hit to demand looks inevitable now.”