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UK construction sector returned to growth in January

January data signalled a solid expansion of activity in the UK construction sector, with the seasonally adjusted Markit/CIPS Construction Purchasing Managers' Index posting 53.7, up from 49.1 in December. An improvement in weather conditions at the start of the year helped to boost construction work, while there were also gains in new business. Despite rises in both new orders and activity, employment nonetheless fell again.

 

For the first time since August 2010, all of the three broad UK construction sub-sectors recorded an increase of activity. Civil engineering was the strongest performing category, having seen a slight reduction in activity during December. Commercial based construction activity meanwhile extended its sequence of growth to eleven months. There was a slight increase of house building in January to end a four-month period of contraction.

Companies reported that January's improvement in part reflected a rebound from harsh weather in December, which had contributed to the first fall in activity since February of last year. Looking at the trend in the data over the past two months as a whole, the picture is one of very modest growth, well below the strong pace seen in the first half of last year.

Incoming new business received by UK construction companies increased modestly during January. Panellists commented that increased tender opportunities and contract wins boosted new order volumes. Growth was in part aided by better weather conditions.

In contrast to the rebounds in activity and incoming new business, January data signalled a further reduction in the construction sector workforce. This was the seventh successive month where job cuts have been indicated, although the latest reduction in staffing levels was the smallest for five months.

Sub-contractor usage also declined over the month, falling at the sharpest rate since October 2009. Rates charged by sub-contractors likewise fell, Page 1 of 3 (c) Markit Economics Limited 2011
dropping for the twenty-ninth successive month as firms competed on price for new business.
Input costs faced by construction companies in the UK rose at the fastest rate since May 2010, driven up by higher raw material prices. However, the rate of increase remained well below that seen prior to the onset of the financial crisis in early 2008.

Optimism regarding companies' activity levels in twelve months time rose to an eight month high, and has improved substantially since hitting a low last September. The overall level of optimism nevertheless regained only half of the ground lost compared to the long-run average recorded prior to the financial crisis. Ongoing improvements in general economic conditions and a focus on marketing are expected to boost activity. However, some concerns remained over cuts in public spending.

"The UK construction sector showed a welcome bounce-back from the snow-related drop in activity late last year," says Chris Williamson, Chief Economist at Markit.

" However, after estimating for the boost to activity in January resulting from the disruption to workflows in December, the underlying growth trend remains only very modest and well below the surging pace seen in the second quarter of last year.

"Looking at the trend in recent months, the housing market seems to be a particular area of weakness, with house building stagnating at best. Civil engineering has seen only very modest growth, leaving commercial activity as the only sector recording any noteworthy expansion, albeit well below that seen last spring.

"The outlook appears to be one of nervous optimism. Confidence over future business prospects was at its strongest in eight months, but this still remained relatively subdued compared to the long-run average. This nervousness about future prospects was highlighted by a disappointing further reduction in employment."

Commenting on the report, David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply, said:

"This is good news for the Government as the construction sector seems to have bounced back, suggesting it was the widespread chaos caused by the snow, that had such an impact and hampered growth in December.

"Despite the growth of activity, an air of caution persists amongst construction companies as employment levels continue to fall. Some companies that are doing well are hiring but many more companies are continuing to adjust to lower workloads and deferral of projects. Until growth becomes sustained it is unlikely we will see employment levels rise substantially and consistently.

"At the moment it is hard to tell what 2011 holds for the sector, even though confidence about future activity has risen, it is still weak and many are pinning their hopes on general economic improvements to make that confidence a reality. Furthermore, the rise in raw material prices as well as the latest VAT hike will add to the worries for the sector. Bearing this in mind we may be looking at another disappointing year with continued uncertainty where hopes are dashed."

T: +44 1780 761576
E: trudy.salandiak@cips.org
W: www.cips.org

4th February 2011




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