Scrapping of HS2 will derail future pipeline for construction industry
05 October 2023
According to the latest PMI data by S&P and CIPS, the headline construction PMI for September fell sharply to 45, down from 50.8 in August, amidst disruption to government infrastructure projects, exacerbated civil engineering activity and the continued slowdown in the housing market.
Figures from September show falls across the majority of indices, most notably in housing activity, new orders and civil engineering activity, which fell to 38.1, 44.2 and 45.7. These falls are all clear signs that the construction industry faces financing and infrastructure challenges over the next year, especially as the government has recently announced plans to axe its HS2 scheme.
Commenting on the data, Kelly Boorman, partner and national head of construction at RSM UK, said: ‘This month’s fall in the headline PMI to 45 is the steepest drop in three years and does not come as a surprise, with the data finally catching up with sentiment on the ground. This follows prolonged slowdown in the residential market, the post-Covid lag after working through major backlogs of work, and this week’s government announcement that HS2 is being axed.
‘Long-term industry outlook is severely dampened due to the axing of HS2, with questions raised by the industry as to the timeline in re-allocating the £36b to other infrastructure projects and the pace in which the projects can be procured and mobilised. With government announcements that HS2 sites will create opportunity to build more regional and local affordable housing, this will help stimulate local communities and address housing targets. Many housebuilders however had planned for HS2 and acquired land and planning in line with this project and will need to re-visit to align with new local transport, connectivity and community project plans. This exacerbates existing market fragility as interest rates and inflation continue to dry up housebuilders’ pipeline of activity.’
She added: ‘In recent months, the availability of labour has improved, and material prices stabilised, the scrapping of HS2 will undoubtably derail the pipeline of future activity for many contractors and their supply chain, coupled with the delay in mobilising new infrastructure projects not even announced by government, this will put some businesses at risk and create further industry uncertainty. Ultimately, the outcome of HS2 is going to change industry sentiment and while it has been expected, it has now become a reality and businesses need to turn their focus to replacing that work as the pipeline contracts significantly and work available becomes more attractive to contractors and the supply chain attached to HS2.
‘It is therefore important that government quickly focuses on mobilising other infrastructure projects, sticking to its promise of allocating the £36bn to new connectivity and regional spend, along with offering support for and investment in technology and upskilling to futureproof the construction industry and retain skilled labourers in the UK.’
Thomas Pugh, economist at RSM UK, said: ‘The sharp fall in the construction PMI suggests that contractor sentiment and resilience is at a low level and it is not difficult to see the economy slipping into recession in early 2024 as the impact of interest rate hikes continue to feed through into the real economy.
‘The construction sector has been hit hard by the downturn in house prices, which has dampened house building, and the souring in sentiment around civil infrastructure, exacerbated by the cancellation of phase 2 of HS2. But commercial activity also fell sharply to 47.7. The PMI is probably overstating the size of the fall in September given the negative sentiment about government policy, but it seems inevitable that output in the construction industry will weaken going into Q4. However, there was better news on input prices, which dropped again to 50.1 as the previous surge in materials prices eases.
‘Questions remain about how quickly and effectively the government can redeploy the money saved on HS2, but given the employment and inflation situation looks better now than it did a couple of years ago when HS2 was being procured, if government can redeploy the HS2 funding and mobilise new projects this will help the industry recover.’
Figures from September show falls across the majority of indices, most notably in housing activity, new orders and civil engineering activity, which fell to 38.1, 44.2 and 45.7. These falls are all clear signs that the construction industry faces financing and infrastructure challenges over the next year, especially as the government has recently announced plans to axe its HS2 scheme.
Commenting on the data, Kelly Boorman, partner and national head of construction at RSM UK, said: ‘This month’s fall in the headline PMI to 45 is the steepest drop in three years and does not come as a surprise, with the data finally catching up with sentiment on the ground. This follows prolonged slowdown in the residential market, the post-Covid lag after working through major backlogs of work, and this week’s government announcement that HS2 is being axed.
‘Long-term industry outlook is severely dampened due to the axing of HS2, with questions raised by the industry as to the timeline in re-allocating the £36b to other infrastructure projects and the pace in which the projects can be procured and mobilised. With government announcements that HS2 sites will create opportunity to build more regional and local affordable housing, this will help stimulate local communities and address housing targets. Many housebuilders however had planned for HS2 and acquired land and planning in line with this project and will need to re-visit to align with new local transport, connectivity and community project plans. This exacerbates existing market fragility as interest rates and inflation continue to dry up housebuilders’ pipeline of activity.’
She added: ‘In recent months, the availability of labour has improved, and material prices stabilised, the scrapping of HS2 will undoubtably derail the pipeline of future activity for many contractors and their supply chain, coupled with the delay in mobilising new infrastructure projects not even announced by government, this will put some businesses at risk and create further industry uncertainty. Ultimately, the outcome of HS2 is going to change industry sentiment and while it has been expected, it has now become a reality and businesses need to turn their focus to replacing that work as the pipeline contracts significantly and work available becomes more attractive to contractors and the supply chain attached to HS2.
‘It is therefore important that government quickly focuses on mobilising other infrastructure projects, sticking to its promise of allocating the £36bn to new connectivity and regional spend, along with offering support for and investment in technology and upskilling to futureproof the construction industry and retain skilled labourers in the UK.’
Thomas Pugh, economist at RSM UK, said: ‘The sharp fall in the construction PMI suggests that contractor sentiment and resilience is at a low level and it is not difficult to see the economy slipping into recession in early 2024 as the impact of interest rate hikes continue to feed through into the real economy.
‘The construction sector has been hit hard by the downturn in house prices, which has dampened house building, and the souring in sentiment around civil infrastructure, exacerbated by the cancellation of phase 2 of HS2. But commercial activity also fell sharply to 47.7. The PMI is probably overstating the size of the fall in September given the negative sentiment about government policy, but it seems inevitable that output in the construction industry will weaken going into Q4. However, there was better news on input prices, which dropped again to 50.1 as the previous surge in materials prices eases.
‘Questions remain about how quickly and effectively the government can redeploy the money saved on HS2, but given the employment and inflation situation looks better now than it did a couple of years ago when HS2 was being procured, if government can redeploy the HS2 funding and mobilise new projects this will help the industry recover.’
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