Soaring energy prices and delays to new work causing significant concerns for construction sector

04 august 2022

The knock-on impact of soaring energy prices is being felt strongly by the UK construction sector as businesses face delays to new work while continuing to operate with disrupted global supply chains. 

According to the latest PMI data by IHS Markit and CIPS, the headline construction PMI fell to 48.9, down from 52.6 in June, showing the first retraction in the market since May 2021. The fall in July was driven by a dramatic fall in civil engineering activity which fell from 54.3 to 40.1, as a result of delays to major projects, retendering of local and central government projects and an uncertain political climate.

Kelly Boorman, partner and national head of construction at RSM UK, said: ‘The construction PMI in July saw the sharpest drop in output in 18 months, highlighting how activity in Q2 was driven by a backlog of work brought about by the pandemic. While this pipeline of work provided businesses with confidence in future output in the short term, the monthly fall in July came as a result of significant delays and re-tendering of projects bringing new work to a halt, along with soaring energy prices and cost pressures. This has become increasingly recurrent in projects for local and central government.’ 

She added: ‘Although future activity rose in July from 59.7 to 63.5, which coupled with suppliers’ delivery times improving from 39.6 to 44.1 shows encouraging signs for the sector, disruption to the supply chain and refunding challenges post-pandemic are likely to have an impact on the number of contractors entering administration. Looking to the future, while the availability for subcontractors is currently stable, we can expect this figure to decline rapidly throughout Q3 as the impact of administrations on the industry’s workforce starts to materialise. 

‘The construction industry has recovered quickly post covid with pipelines looking plentiful for coming years, but this steep fall in activity and market uncertainty coupled with political unrest and stalling of projects could be the sign of that gauge has changed direction.’ 

Thomas Pugh, economist at RSM UK, said: ‘Time to buckle up, because economic growth is in for a bumpy ride over the next year or so. The drop in the CIPS Construction PMI adds to the evidence that economic growth is already slowing sharply and the economy may already be in recession. 

‘Admittedly, the sharp drop in the input prices balances, which hints that inflationary pressure may be starting to ease, is encouraging. What’s more, the rise in the suppliers’ delivery times to its highest level since the pandemic suggests supply chain issues across the economy have eased. 

‘However, growth is likely to be extremely erratic over the coming year, as big jumps in inflation and potential supply chain disruptions will have major impacts in Q3 and Q4. The huge surge in energy prices over the last few weeks, and subsequent squeeze on disposable incomes, makes it increasingly likely that the economy will fall into recession towards the end of the year.’

Kelly  Boorman
Partner, Head of Construction
Kelly  Boorman
Partner, Head of Construction