Decline in commercial activity seen in UK construction, says survey 

Summary

• There has been a decline in the activity of the UK construction sector in January this year due to renewed downturn in commercial activity, said the IHS Markit/ CIPS survey.
• The raw material purchase prices recorded their highest rise since June 2018 for the buildings and construction sector.

The British construction sector contracted marginally during January, a latest survey released by the IHS Markit, stated on Thursday, 4 February, bringing an end to a seven-month expansion period. The construction Purchasing Managers' Index (PMI) recorded a value of 49.2 in January, falling from 54.6 in December. 

The overall construction output signalled a decline for the first time since May 2020. The third lockdown implemented on 5 January and concerns over the economic recovery had led to clients being hesitant, particularly for new commercial projects. Factors such as disruption in supply chains, transport shortages, and delays at UK ports due to the post-Brexit scenarios added to a downturn in supplier performance during the month, said the survey. 

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Let’s go through the details of the survey to explore the reasons for this fall in construction output: 

Commercial activity: The commercial activity index and work on civil engineering projects reported a fall for January. However, they were offset by the strong growth in the residential segment’s activity.  

Costs incurred on raw materials: Intense cost pressures were experienced by the construction companies due to rise in prices for plaster, steel, and timber. The overall rate of input price inflation rose to its highest in over the last 18 months.  

Employment: The month witnessed a huge dip in jobs across the sector, which resulted in the reversal of the marginal expansion observed during December.  

New business: There was a slight rise in new business volumes for the period. However, the rate of expansion’s momentum was lost. Most of the survey respondents said that the pandemic led to delay of projects in the commercial segment.  

Purchases: Though the growth rate of purchasing activity slowed down considerably since November, it increased for the eighth consecutive month in January.  

Tim Moore, Economics Director at IHS Markit, said that a seven-month run of expansion of the construction sector ended in January as the overall output volumes were dragged down by a renewed slide in commercial work.

He added that house building, which was the only major construction segment to observe growth, has seen the momentum slowed considerably in comparison to H2 2020. 

Despite a slight downfall, the latest data suggests that the business expectations for 2021 remained positive.  

Let’s now discuss some stocks of the UK construction sector to know how they have been performing recently: 

Barratt Development PLC (LON: BDEV) 

The company said that it made a solid start to this year keeping in mind the continued economic uncertainties. Barratt Development has been leading the UK housing market by delivering high quality sustainable homes and developments across England, Scotland, and Wales. The company reported 9,077 completion of houses and recovered the adjusted operating margin to 20.3 per cent for the six-month period ending 31 December 2020 from 19.4 per cent in the previous six months. 

Persimmon PLC (LON: PSN) 

Despite the challenges posed by the pandemic, the group has been performing strongly. Persimmon was successful in delivering 8,675 new home legal completions in H2 2020, generating new housing revenues of £3.13 billion for the year ending 31 December 2020 (2019: £3.42 billion). 

Taylor Whimpey PLC (LON: TW.) 

In the trading update for the full year ended 31 December 2020 published recently, Taylor Whimpey said that it recorded a decline in the total UK home completions (including joint ventures) by approximately 39 per cent to 9,609 (2019: 15,719), driven by the reduced production capacity during the Q2 2020 shutdown. 

The company also specified that it has not suffered from Brexit-related supply chain issues and the builder cost inflation has remained lower than in recent years.