UK construction sector continues to rebound - Markit survey

UK construction industry activity continued to improve in June, reaching its highest level in seven months.

IHS Markit's construction purchasing managers' index jumped to 53.1 for June from the 52.5 it reached a month before, as the industry picked up for the third month in a row after a weather affected start to the year. The market had expected the PMI, for which a reading above 50 indicates growth, to remain at 52.5 for June.

The average level of the PMIs between April and June is consistent on past quarters with the official construction output holding steady for the second quarter of 2018, having dropped by 0.8% quarter-on-quarter in the first three months of the year.

The survey revealed positive signs for coming months, with the strongest rise in new orders in 13 months and the largest upturn in input buying for two-and-a-half years as new projects started and some forward buying to mitigate anticipated forthcoming price rises.

Once again, residential house-building was the strongest performing subsector, while commercial output expanded at the fastest pace since February. However, growth in civil engineering activity slowed to a three-month low.

Higher transportation costs and rising prices for steel-related inputs led to the fastest reported increase in cost burdens across the construction sector since last September.

Many companies responding to the survey pointed to a general improvement in client demand, which was reflected in a rebound in new order volumes after a decline in May, while employment numbers grew to a year's high.

“The latest increase in UK construction output marks three months of sustained recovery from the snow-related disruption seen back in March," said Markit associate director Tim Moore.

Looking at commercial building, he said companies suggested that improved opportunities for industrial and distribution work were the main bright spots, which helped to offset some of the slowdown in retail and office development.

The construction sector looks likely to have made a positive contribution to UK economic growth in the second quarter after contracting 0.7% quarter-on-quarter in the first quarter, said economist Howard Archer of the EY Item Club. "This reinforces hopes that GDP growth improved to 0.4% in the second quarter."

He added: "While the survey is encouraging, there is a concern that the outlook remains challenging for the construction sector. The upside to companies’ willingness to commit to new projects may be limited in the near term by the weakness of the economy in the first quarter and significant Brexit uncertainties. A shortage of new infrastructure projects to bid for is also a concern."

Archer said construction companies will be hoping that the measures announced in November’s Budget, aimed at lifting new house building to 300,000 a year, will prove to be genuinely effective, though the very real possibility remains that house building activity could be pressurised by lacklustre housing market activity and subdued prices.

The pick-up in June indicates that the sector no longer is in retreat, said Pantheon Macroeconomics, "but the near-term outlook remains bleak", noting that new orders remain well below its 20-year average.

"Looking ahead, the Help to Buy Scheme will continue to incentivise new home purchases, even though overall housing market demand will remain depressed by rising mortgage rates. But the outlook for commercial work hinges on the Brexit talks, which likely will become increasingly acrimonious over the coming months before common ground is found," economist Sam Tombs said.

"What’s more, the planned 5.4% year-over-year reduction in public sector gross investment this year will continue to depress the civil engineering sector. As a result, we think it’s still too soon to be looking for the construction sector to support GDP growth."