- The construction Purchasing Managers’ Index (PMI) picked up in April, adding to the positive signs from other indicators that the economy is turning a corner. Admittedly, the latest PMI pointed to only modest growth in construction output. But evidence of a significant easing in supply-chain frictions, a housing market proving more resilient than expected and the prospect of the wider economy returning to meaningful growth from the summer should lift the construction sector’s performance.
- Construction still faces significant challenges. Higher interest rates will weigh on residential and commercial activity, changes to planning rules risk discouraging housebuilding, and still-serious financial pressures on households may hold back spending on home improvements.
- However, housing market weakness appears to have passed its most significant point. Supply chain problems facing construction businesses have eased markedly, and 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.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “A rise in April’s construction PMI to 51.1 from 50.7 in March was consistent with growth, albeit modest, in construction output. But combined with a healthy rise in April’s composite and services PMIs, the latest construction index adds to the evidence that the economy appears to be turning a corner. It’s still likely that GDP will struggle to grow in Q2, given the impact of the extra public holiday and the drag on activity in some sectors from continued industrial action. However, April’s full set of PMIs suggests that the economy’s underlying performance is improving, creating a solid foundation for the EY ITEM Club’s expectation of a return to meaningful growth in the second half of this year.
“That said, challenges to the construction sector haven’t gone away. Higher interest rates will likely weigh on residential and commercial activity, changes to planning rules risk discouraging housebuilding, and still-serious financial pressures on households may hold back spending on home improvements.
“But while the housing market continues to face significant headwinds from rising mortgage rates and stretched affordability, it appears to be bearing up better than expected, as evidenced by a significant rise in mortgage approvals in March and only limited signs, so far, of a correction in prices. The supply chain frictions which have held back construction activity are receding – April saw lead times among vendors shortening to the greatest extent since 2009. Last month’s introduction of 100% expensing for some types of business investment could also support commercial building projects in certain sectors. And the relatively energy-intensive construction sector should gain more than most from continued falls in wholesale energy prices.”
