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Positive Outcomes

2 Feb
17:27
Good news for construction – but is it sustainable?

Good news for construction – but is it sustainable?

Submitted by Simon Rawlinson, EC Harris, Head of Strategic Research
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Simon Rawlinson Biography

The release of the Monthly Construction PMI data is not usually an event that quickens the pulse, but I suspect this morning’s release was anxiously awaited from Downing Street to Threadneedle Street.  A fall in construction activity was a major cause of the 0.5% decline in GDP in fourth quarter 2010 – and if the PMI was still falling, then pinning the blame on bad weather would look much less credible.

The surprisingly good reading – 53.7 compared to a consensus forecast of 49.9 indicates consistent growth across all three industry sectors surveyed, house-building, civil engineering and commercial.  Civil Engineering saw the strongest growth during the month, whilst the commercial sector has maintained an 11 month upward sequence.  However, seen in the context of a rebound from December’s disappointment, the figures indicate steady rather than stirring levels of activity.

However, behind the good news, there is still plenty of evidence of an industry that is still taking measures to adjust to reduced volumes of work in sectors such as house building, road construction and the public sector.  Construction employment continues to drop and the survey suggests both falling use of sub-contractors, and continuing downward pressure on rates.

So what are we to make of the latest figures?  Firstly they are a genuine cause for relief – a poor January would have given further evidence of the onset of the construction double-dip that has now been forecast by most industry commentators.  However, the rebound suggested by the PMI may be difficult to sustain.  Signals from the house building and public sectors point towards a slowdown and whilst the commercial sector is getting busier, constraints on funding remain.  Overall, construction is unlikely to follow manufacturing’s stellar recovery, with below-par performance at best, but for now at least we can be more confident of the future.  Outside of London and other favoured locations however, the latest PMI may not reflect reality on the ground.

Looking forward, two aspects of the latest PMI are worthwhile monitoring – firstly increases in input costs will continue to heap pressure on a supply chain that currently cannot push price rises through – this is a problem for the man in the street and Bank of England as well, but with substantial price increases coming throughout the manufacturing supply chain, the life of the typical sub-contractor could become even more challenging.  The second concerns the sensitivity of the PMI as a leading indicator of actual construction activity.  According to early ONS estimates, construction activity fell by over 3% in the fourth quarter but the PMI barely registered this fall.  Was this drop in activity really down to snow, or has a renewed downturn also begun – unnoticed as stimulus spending has slowed?  Falling new orders, not reflected in the PMI, suggest the latter.  Economists, politicians and constructors will unfortunately need to wait until April’s GDP release to get a really clear idea of where we currently stand.

 In the meantime, construction remains a buyers’ market and the well-advised client is seeking to secure sustainable value through smart procurement of the most commercially advantageous and secure bid.  Lowest price bids at this point in the cycle should be reserved for clients with the resources and flexibility to run the risk of Caveat Emptor.

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