- The construction Purchasing Managers’ Index (PMI) fell back in March, in common with its services and manufacturing counterparts. However, it still pointed to modest growth in the sector, reinforcing the EY ITEM Club’s view that the economy eked out a small rise in GDP in Q1.
- The near-term outlook for the construction sector remains challenging. Higher interest rates will weigh on residential and commercial activity, the soft housing market and changes to planning rules risk discouraging housebuilding, and falling household real incomes are likely to discourage spending on home improvements.
- However, housing market weakness may have troughed. More signs of a revival in consumer and business confidence should bolster the construction sector, as will falling energy costs and disinflationary pressures in general. Due to the relatively cyclical nature of the sector, construction firms could be among the first to benefit from the economic recovery the EY ITEM Club expects to become embedded in the second half of this year.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “Following falls in the services and manufacturing PMIs in March, the construction PMI followed suit, falling to 50.7 from 54.6 in February. However, this still signalled growth in the sector, and the S&P Global/CIPS survey’s forward-looking balances were more robust. New work rose at the second fastest pace since July 2022 and employment growth was at a five-month high. Combined with other upbeat indicators from the retail sector, consumer confidence and tax receipts, the latest PMIs reinforce the EY ITEM Club’s expectation that the economy grew slightly in Q1.
“Construction activity continues to face sizeable headwinds. The housing market is likely to stay soft, given relatively high mortgage rates, a weak economy and the closure of the Help to Buy scheme at the end of March. A watering down of what had been mandatory targets set by the Government for house building presents another potential obstacle. Higher interest rates are also affecting construction businesses’ balance sheets.
“That said, March’s rise in mortgage approvals and a revival in home sales and demand in the latest survey data suggest housing market weakness may have bottomed out. Indeed, optimism among firms in the latest S&P Global/CIPS survey was at the highest since February 2022. The introduction of 100% expensing for some types of business investment could support commercial building projects in certain sectors. What is a comparatively energy-intensive sector will benefit disproportionately from the recent significant fall in wholesale energy prices. And as a relatively cyclical industry, construction could be among the first to benefit from the economic recovery that the EY ITEM Club expects to become embedded in the second half of 2023.”