- The construction Purchasing Managers’ Index (PMI) rose to a three-month high in May. With the services index also pointing to robust growth, it’s looking more likely now that the economy will manage to expand in Q2, despite the drag on activity from the extra public holiday for the Coronation and the impact of industrial action.
- There was also better news on inflation in the sector, with growth in cost pressures faced by construction businesses easing to the slowest since September 2020. However, the Bank of England will likely be focused far more on evidence of stubborn inflation in the dominant services sector.
- Construction is benefiting from a significant easing in supply-chain frictions and will gain from the prospect of the wider economy returning to meaningful growth from the summer. But the likelihood of further rises in 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.
Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “The latest construction PMI for May signalled a sector enjoying modest but accelerating growth. A PMI of 51.6 was up from 51.1 in April and was the highest for three months. However, there was a substantial divergence in the performance of different construction sub-sectors. Commercial building and civil engineering gained momentum, but work on residential building projects decreased for the sixth month running and at the fastest pace since May 2020.
“Alongside a pick-up in overall growth in the sector, construction businesses also saw inflationary pressures ease further. Input price inflation slowed to the weakest for 32 months and inflation in prices charged was the weakest in just over two-and-a-half years. That said, given construction’s small, 6%, weight in the economy, these developments are unlikely to have much bearing on the Bank of England’s thinking in advance of its next meeting this month. The Bank of England will likely be more concerned with continued signs of inflation persistence in the dominant services sector.
“The latest set of activity surveys mean it’s now looking more possible that GDP will grow in Q2, despite the impact of the extra public holiday for the Coronation and the drag on activity in some sectors from continued industrial action. Meanwhile, May’s full set of PMIs creates a good base 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. The likelihood of further interest rate rises 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, the supply chain frictions which have held back construction activity are receding – May saw lead times among vendors shortening to the greatest extent since August 2009. The introduction earlier this year of 100% expensing for some types of business investment could 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.”
