August’s construction PMI mirrored the message sent by the services and manufacturing PMIs, remaining in contractionary territory for the second month in a row. And a number of pressures facing the sector point to that weakness persisting for the foreseeable future.
Rising inflation and falling household real incomes are likely to continue affecting housing market activity and discouraging spending on home improvements. Rapid rises in raw material prices, strong growth in pay and higher interest rates are squeezing bottom lines, while the construction sector is a heavy energy user and so is disproportionately affected by energy price rises.
Given the headwinds facing the construction sector, the EY ITEM Club expects activity to remain weak. But plans to boost spending on public sector infrastructure as a share of GDP to a multi-decade high and a housing market which, while set to slow, appears unlikely to shrink, means the outlook for construction is not all bad. But much will depend on whether further government support to offset higher energy bills covers businesses as well as households.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “After a weak set of PMIs from the services and manufacturing sectors, August’s construction PMI followed suit. An index of 49.2 meant the PMI remained below the 50 ‘no-change’ mark separating the S&P Global/CIPS survey’s measure of expansion from contraction for the second month in a row, albeit rising a little from July’s 48.9.
“The near-term outlook for construction appears challenging. The cost of living crisis is likely to weigh on housing market activity and reduce demand for home improvements. Although August’s survey pointed to some easing in inflationary pressures faced by construction firms, costs and prices continued to rise at historically strong rates, reflecting higher prices for cement, steel and other raw materials and rapid growth in pay. The cost of debt is climbing and, as a heavy energy user, the construction sector is particularly exposed to energy price rises.
“Granted, the sector isn’t out of supports. The Government plans to boost spending on infrastructure as a share of GDP to a multi-decade high, linked in part to the levelling-up agenda, while the housing market which, while slowing, is unlikely, in the EY ITEM Club’s view, to shrink. But, as with the rest of the private sector, prospects for construction over the rest of this year and into 2023 will depend heavily on the as-yet-unknown scale and coverage of government support to offset climbing energy bills.”