04 Nov 2022
According to the latest PMI data by IHS Markit and CIPS, the headline construction PMI rose to 53.2 in October 2022, up from 52.3 in September, continuing the surprising upward trend of the previous month, with the latest increase driven by commercial activity.
However, as the knock-on impact of soaring energy prices and inflation is now being seen more strongly, a truer picture is likely to be painted towards the end of Q4 2022 as the industry is hit by the first signs of the recession.
Kelly Boorman, partner and national head of construction at RSM UK, said: ‘Following a surprising uptick in September, the latest rise in the headline construction PMI for October comes as a further surprise, given the major disruption faced by the industry. But, when looking more closely at the figures, the spike in commercial activity is driving this month’s increase, and the mild October weather may also have skewed this month’s figures which would normally delay works at this time of year. However, other metrics paint a truer picture and reinforce why business confidence is plummeting, as energy prices, inflation and labour shortages exacerbate the pipeline of work.
‘In particular, with future activity falling sharply in October from 58.2 to 53.4, sector insolvencies at the highest level in a decade, and Rishi Sunak preparing to curb government spending on large infrastructure projects to manage the budget deficit, significant challenges lie ahead. This, coupled with new orders declining from 50.1 to 49.7 highlight the headwinds likely to surface towards the end of Q4 as ongoing works are completed. Indeed, businesses will be waiting with bated breath for the autumn statement on 17 November to see what, if any, government support will be available for construction and other energy and labour-intensive industries.’
She added: ‘As interest rates rose again yesterday to 3% – the biggest rise in more than three decades, future output is likely to keep falling as projects become more expensive, causing further strain on the supply chain and subcontracting. The industry is also facing the added pressure of cost-plus contracts, with almost no fixed-rate contracts available, adding another layer of financial challenge as demand slows down.
‘While the government will be making firm decisions to cut back on spending, the industry needs long-term investment, in order to build back business confidence, ensure the completion of ongoing projects, maintain a pipeline of work, and retain skilled labour in the UK.’
Thomas Pugh, economist at RSM UK, said: ‘Time to buckle up, because the economy is almost certainly in a recession now. The rise in the construction PMI over the last few months makes it the odd one out. The sharp falls in other early indicators, such as the composite PMI and retail sales volumes all point towards a contraction in the economy in Q3.
‘At 74.5, input inflation in the construction industry remains exceptionally high. The inflation outlook over the next year depends heavily on what austerity measures the prime minister enacts and how he’ll reform the energy price guarantee. Removing the guarantee would mean that inflation jumps back to almost 11% in April, but we don’t think that would necessarily mean higher interest rates. The Bank of England would probably look through a one-off jump in inflation and focus on domestically generated inflation. On that basis, expect interest rates to peak at 4.5% early next year.
‘Overall, we expect the recession to last until Q3 2023 and result in GDP falling by around 2.5%. We expect a 0.5% q/q drop in GDP in Q3 to be followed by a similar sized fall in Q4 as consumers reduce their spending in the face of soaring inflation and mortgage bills.’