October’s construction PMI rose further above the 50 ‘no-change’ mark – a positive contrast with sub-50 readings for the services and manufacturing sectors. But whether construction’s outperformance can continue is questionable.
Although mortgage rates have retreated from recent highs, they’re still significantly above levels of only a few months ago, implying weaker demand for properties and a less supportive environment for house building. Cost pressures facing construction businesses have eased a little, but they remain historically high, while high inflation and falling household real incomes are likely to discourage spending on home improvements.
Government action to limit rises in business energy bills until next April will constrain at least one source of cost pressures and is of particular help to the relatively energy-intensive construction sector. However, the prospect of cuts in public sector infrastructure spending in the Autumn Statement could undermine hopes that stronger public sector construction demand might mitigate private sector weakness.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “A rise in October’s construction PMI to a five-month high of 53.2 – from 52.3 the previous month – was in marked contrast with declines in the services and manufacturing PMIs, both of which were below the 50 ‘no-change’ mark. There was also good news on inflationary pressures facing construction businesses. Helped by lower commodity prices, growth in costs was at a 20-month low.
“But whether the construction sector can maintain its outperformance versus other sectors is questionable. Although mortgage rates have retreated from recent highs, they’re still significantly above the levels of only a few months ago. As a result, the EY ITEM Club still expects a marked slowdown in the housing market and potentially an outright fall in house prices – developments which would likely weigh on house building. Sterling’s weakness will exacerbate already strong cost pressures facing construction businesses, while high inflation and falling household real incomes are likely to discourage spending on home improvements too.
“The sector isn’t entirely out of factors in its favour. Government intervention to limit rises in businesses’ energy bills until next April will be of particular help to the relatively energy-intensive construction sector. However, hopes that stronger public sector demand could compensate for private sector weakness are now looking more tenuous. With the new government appearing to prioritise reducing public borrowing over promoting economic growth, there’s a risk that the Autumn Statement on 17 November could see spending on public sector infrastructure reduced.”