UK construction sector rebounds ‘as recession fears fade’; car sales jump 26%

UK construction sector rebounds in February despite weak housebuilding

Just in: the UK’s construction sector rebounded back into growth last month as fears of a recession fade.

The S&P Global/CIPS UK Construction Purchasing Managers’ Index (PMI), which tracks activity in the building sector, jumped to 54.6 in February, up from 48.4 in January.

That shows the fastest growth since May 2022, and well above expectations of a reading around 49.1. Anything over 50 shows a rise in activity.

There was a “robust increase” in overall business activity across the UK construction sector last month, S&P Global reports, after two months of decline.

The rate of growth was the strongest since May 2022, supported by a marked rebound in commercial work and a positive contribution from civil engineering activity.

But, activity in the house-building sector decreased for the third month running.

Many housebuilders have been cutting back following a drop in demand, as house prices fall.

Tim Moore, economics Director at S&P Global Market Intelligence, says that housebuilding was the ‘weak spot’ in the sector:

Some firms noted that fading recession fears and an improving global economic outlook had boosted client confidence in the commercial segment. At the same time, work on major infrastructure projects such as HS2 contributed to the expansion of civil engineering activity in February.

Cutbacks to new house building projects remained the weak spot for construction sector activity, with total residential work falling for the third month running in February. Survey respondents often commented on subdued demand and a headwind from elevated interest rates.

Construction companies appear increasingly confident about the year ahead business outlook, with optimism rebounding strongly from the lows seen in the final quarter of 2022. Softer inflationary pressures and the least widespread supplier delays for just over three years were factors supporting business expectations in February.”

Key events

Back in the eurozone, retail spending was weaker than expected at the start of this year.

Eurostat data shows that retail sales rose by 0.3% month-on-month in January, but were 2.3% lowe than a year before.

Economists had expected a 1.0% month-on-month rise, and a 1.8% year-on-year fall, Reuters says.

It suggests that high inflation, and the squeeze from higher borrowing costs, continues to weigh on the euro area.

The data indicates that Europe hasn’t enjoyed an economic rebound yet – with ING predicting GDP growth will be flat in the first quarter of 2023.

ING economist Bert Colijn says:

This is a weak start to the first quarter and makes growth over the quarter a challenge. Retail sales have been on a declining trend since November 2021, but taking the latest data into account, we can see that there has been a more rapid decline since the autumn of last year.

While surveys about the first quarter have been relatively upbeat so far, these retail sales data don’t give much evidence that a rebound has started. We expect GDP growth in the first quarter to be flat, writes @BertColijn.https://t.co/MGiCgJAxxd

— ING Economics (@ING_Economics) March 6, 2023

Thomas Pugh, economist at audit, tax and consulting firm RSM UK, fears that the UK economy will drop into recession this year, despite the pick-up in construction growth last month.

Pugh says the economy has been more resilient than expected, but suspects February’s PMI surveys may be overstating its strength.

He explains:

“The rebound in the construction PMI is more evidence of just how resilient the economy has turned out to be. But beware a false spring.

We still expect the economy to fall into a mild recession in the first half of this year and the construction industry will be hit hardest by the 400bps increase in interest rates over the last year. As such, it probably won’t be long before the construction PMI resumes its downward trend.

‘The bounce back in the construction PMI in February, to its highest level since May, follows the rebound in the services and manufacturing PMIs.

Undoubtedly, the economy has been much more resilient than expected given the cost-of-living crisis and the massive increase in interest rates. But the across the board rebound the PMIs last month should probably be taken with a pinch of salt.

IoD urges Ofgem to protect business customers

UK energy companies are failing to treat many business customers fairly, the Institute of Directors says today.

The IoD has written to industry regulator Ofgem urging them to take action to secure “a well-functioning energy market” for non-domestic customers.

The IoD survey has found that one in five (18%) businesses encountered at least one form of disadvantageous treatment by energy suppliers in the previous six months.

The most commonly reported problem was energy suppliers requesting a larger share of the bill to be paid in advance (11%). This was followed by refusal to negotiate payment terms when requested to do so (6%) and refusal to renew a contract (6%).

Jonathan Geldart, director general of the Institute of Directors, says Ofgem must heed the concerns of business customers:

At a time when energy prices are at an all-time high, it is important that the energy regulator ensures that any unnecessary burdens for businesses are removed.

The inclusion of take or pay clauses in energy supply contracts to non-domestic customers runs counter to the government’s messaging to business regarding the cost and environmental imperatives to reduce energy consumption.

It is therefore important that Ofgem identifies and recommends the actions needed to address the concerns of business energy customers.”

This morning’s surprisingly strong construction sector report is the latest sign that the risk of recession is easing, says Martin Beck, chief economic advisor to the EY ITEM Club.

Beck points out that there have been other “upbeat indicators” recently, such as rising retail sales, consumer confidence and tax receipts.

Beck says:

February’s construction Purchasing Managers’ Index (PMI) joined its services and manufacturing counterparts in signalling stronger activity in February. Although the economy continues to face significant headwinds, the risk of a recession is receding.
The near-term outlook for the construction sector remains challenging. Higher interest rates will likely weigh on residential and commercial activity, the housing market downturn and changes to planning rules risk discouraging housebuilding, and falling household real incomes are expected to discourage spending on home improvements.
However, the recent improvement in the mood-music surrounding the economy’s prospects, including some recovery in consumer and business confidence, should bolster the construction sector, as will falling energy costs and disinflationary pressures in general. As a relatively cyclical sector, construction firms could be among the first to benefit from the economic recovery that the EY ITEM Club expects to become embedded later this year.

Confidence across the UK construction sector hit its highest level in a year last month, today’s PMI report shows.

Dr John Glen, Chief Economist at the Chartered Institute of Procurement & Supply, says easing supply chain problems and a slowdown in cost inflation cheered building firms.

However, rising mortgage rates continued to dampen the housebuilding sector.

Glen explains:

“The overall figure paints a bright picture of progress in the construction sector with a robust jump in output last month. Supply deliveries were at their most improved since January 2020 and some commentators mentioned sourcing closer to home to avoid logjams in supply chains caused by China’s Covid policy and the war in Ukraine.

New order levels were also at their highest since November 2022 but these strong numbers belie the fact that there is uneven growth in building activity in the UK. Commercial and civil engineering projects dominated this performance with activity on projects such as HS2 and commercial builds. Residential building on the other hand was the odd one out with a third month in contraction as mortgages rates put a dampener on the number of house purchases and buyers were unwilling to commit.

Builders themselves remained cheerful as optimism rose sharply and almost half of the survey’s respondents believed business would improve in 2023. With the slowest inflationary rises for raw materials since November 2020 this offered some relief, and it was cheaper transportation costs that helped offset salary and energy costs which were still rising

The return to growth in the UK construction sector last month will be welcomed by contractors who are hoping the worst of the economy’s storms have passed, says Max Jones, director in Lloyds Bank’s infrastructure and construction team.

Jones explains:

“Despite an uncertain economic picture, many in the industry feel confident. Payment times are proving resilient across supply chains, pipelines on infrastructure and commercial projects are holding up well and inflation, for materials and labour, looks to have passed its peak.

“The industry will be closely monitoring this month’s Budget. While few expect the Chancellor to pull any rabbits out of his hat, clarity around future projects, particularly in the regions, will give contractors the confidence they need to plan and invest in the future.”