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Construction Sector Gained Momentum In January

Builder construction

The latest IHS Markit Construction PMI Index shows that commercial work propelled construction growth to a six-month high in January.

At 56.3 in January, up from 54.3 in December, the headline seasonally adjusted IHS Markit/CIPS UK Construction PMI® Total Activity Index registered above the crucial 50.0 no-change mark for the twelfth month in a row. Moreover, the latest reading signalled the strongest rate of output expansion since July 2021.

Key points from the results:

  • UK construction sector gains momentum after subdued end to 2021
  • Commercial activity helps to offset weaker rise in house building
  • Cost inflation dips to 10-month low as supply issues ease

PwC comments on the IHS Markit Construction PMI January Index:

Lee Wilkinson, PwC Real Assets director, said:

“The UK construction sector saw the challenges brought on by growing skills shortages, price inflation and supply chain issues reach a peak in 2021. 

"Built up demand is now coming through, however, and recent announcements about investment in infrastructure and regional cities are positive and will help to further build confidence across the sector. 

“Skills along with talent recruitment and retention will remain as some of the key challenges in 2022. The climate crisis and operational challenges around how businesses can continue their decarbonisation journey will continue to be front and centre for boards, investors and employees. For those businesses which can remain adaptable, agile and innovative, the outlook for the year ahead will be positive.”  

Mark Addley, Real Estate Deals partner at PwC, comments on supply chain challenges:

“The construction sector has started 2022 with a bang as commercial work accelerated to a six-month high.

“However, there may be a sting in the tail as supplier lead times lengthen due to staff shortages and a lack of haulage availability. 

“We are now seeing developers building up their inventories to protect against supplier delays. The resulting cash drain means construction companies are increasingly approaching lenders to extend their financing facilities, which is by no means a rubber-stamping exercise. 

“The domino effect of lengthening project lead times leads to increasing hold costs for developers and changes the project economics to such an extent that developments can become loss making when subject to fixed price contracts. Rising energy prices will only increase the cost base further"

Lucy Fulmer, head of creditor markets at PwC, reflects on pipelines and credit limit impacts on the sector:

“January’s litmus test of construction firms reveals some encouraging signs across the industry. But the uptick in activity also raises key implications for the many businesses which support the sector. 

“Our interactions with key stakeholders such as trade suppliers tell us that orders and pipeline are very strong but price increases are now being passed on. This means credit limits are insufficient, forcing contractors to pay cash up front for goods. Suppliers, who are arguably more exposed to the tightening economic conditions, are also weathering a slow down in payments alongside an increase in clients using payment plans as cash is squeezed further.” 

Source : IHS, PwC

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10 February 2022

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