RSM say bleaker picture expected in Q4 despite surprising September uptick for construction industry

According to the latest PMI data by IHS Markit and CIPS, the headline construction PMI saw a surprising increase to 52.3 in September 2022, up from 49.2 in August, which saw the first rebound since February. 

The latest rise in construction PMI was driven by increases in commercial, housing and civil engineering activity, as well as the availability of subcontractors. However, looking ahead to Q4 2022, the knock-on impact of soaring energy prices and inflation will be seen more strongly, indicating that the industry will be hit by the first signs of the recession. 

Kelly Boorman, partner and national head of construction at leading audit, tax and consulting firm RSM UK, said: ‘The latest figures for September show a surprising increase in construction PMI, however, will this be a false uplift which we’ll start to see unwind in the next few months? Although there were rises in commercial, housing and civil engineering activity, this is likely due to contracts coming to an end in Q3 2022. In addition, new orders fell slightly, which will weaken business confidence. Energy prices, inflation and labour shortages will make it difficult to capitalise on the pipeline of work. 

‘Future activity also fell further in September from 60.6 to 58.2, and with a growing number of contractors entering administration, targeted support is needed from Liz Truss and newly appointed construction minister Jackie Doyle-Price to help businesses navigate economic headwinds, retain workers, and ultimately stay afloat. To combat these financial challenges, the government measures outlined in the mini-budget bring welcome news for the construction industry and other energy-intensive businesses; with corporate tax frozen at 19% and the annual investment allowance remaining at £1m, alleviating some pressure and facilitating investment for growth. 

‘However, the government also needs to commit to investment in large public sector infrastructure projects, such as the North-East framework, which will bring about a strong pipeline of work and job security, after repealing the IR35 reforms. Looking ahead, to build back business confidence, the prime minister should adopt a framework for skilled labour in the construction industry which has been grappling for stability since immigration rules post-Brexit brought about seismic changes to labour.’

Thomas Pugh, economist at RSM UK, said: ‘Today’s surprisingly positive data suggests the construction sector is holding up. But we don’t expect the resilience to last into the winter. As a much more intensive consumer of energy, the construction sector has been hit even harder by the huge run up in energy prices. 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. What’s more, the huge rise in interest rates (we are expecting rates to peak at around 4.75% early next year) will dampen demand in the housing market and make it more expensive to finance construction projects. As a result, we expect output in the construction sector to drop over the winter and through next year.’