Data reveals record high construction output volumes in Q1 2022

Construction

• The S&P Global/CIPS UK Construction PMI fell to a three-month low of 58.2 in April of 2022 from 59.1 in March, but still pointed to strong growth in the construction sector.

Highlights and key developments from the latest survey include:

1. New order volumes expanded the least in four months as escalating raw material prices and, in some cases, hesitancy due to higher borrowing costs and geopolitical uncertainty were reported as headwinds to demand
2. At the same time, supply chain delays were attributed to shortages of staff, materials and transport, exacerbated by delays at ports and the war in Ukraine
3. Average costs also increased sharply due to high energy, fuel and raw materials cost
4. On the other hand, job growth hit a three-month high
5. Meanwhile, growth projections eased to lowest since September 2020

• New ONS data revealed record-high construction output volumes in Q1 2022, which rose by 3.8% on the previous quarter. Repair & Maintenance work was the key driver of output growth, helped by storms in February and the return of office working which has increased demand for refurbishments. However, the headwinds of price inflation, rising interest rates, the growing cost-of-living crisis and falling consumer and business confidence may be an issue for construction activity growth in future months. These headwinds have impacted new order growth, which contracted by 2.6% in Q1. Despite this, order values for all sub-sectors were above their pre-pandemic levels, supported from pent-up demand from the pre-pandemic period.

• Recently published inflationary metrics and forecasts suggest that the rate of input cost inflation (as measured by indices such as the ONS’ Construction Output Prices Indices or ‘COPI’) and tender price inflation have become more closely aligned over the past 12 months. Strong order books and a healthy construction pipeline have allowed the sharp inflationary rises seen over the period to be passed on into tender returns. All indices show that inflation is expected to remain high for the remainder of this year before easing in 2023 as demand growth eases and supply chains adapt to some of the recent disruptive forces.

• Housing secretary Michael Gove has said that the Government is not bound by the Conservative Party’s 2019 manifesto pledge to “continue progress towards our target of 300,000 homes year by the mid-2020s”. According to ONS figures, 216,000 homes were delivered in 2020/21 but Mr Gove recently explained that the Government is “not bound by one criterion alone”, explaining that aiming for one target risks “making an enemy of the common good”. Speaking ahead of the publication of the Levelling Up and Regeneration Bill, which contains the Government’s long-awaited planning reforms, Gove said that while arithmetic is important:

• Data from Barbour ABI, the construction market monitoring firm, indicates that contract awards and planning approvals were down 33% in April compared to the previous month. Residential construction contract awards were down 47% in April to £1.8bn, while the commercial sector saw a drop of 75% of the value of contracts awarded to just £300m. However, the buoyant warehouse market and the hotel & leisure sector both saw monthly increases in contract awards. While the level of planning approvals is high overall, the picture is dominated by infrastructure development, especially wind farms. There were not many planning approvals in the commercial, hotel & leisure or education sectors. Barbour caveated these falls by suggesting month-on-month changes to figures can be inherently volatile and may have been impacted by a drop in business during the Easter break after a record number of contracts were awarded in March. Tom Hall, chief economist at Barbour ABI, said:

CLIENT & CONTRACTOR NEWS

• Two live UK construction sites being built by McAlpine and Skanska have been used to develop the methodology behind a recently published framework on how firms can improve data collection to increase efficiency. Landsec’s The Forge in Southwark and Norton Folgate, as well as British Land’s Blossom Street development in Spitalfields, have been used as pilot sites to demonstrate how seven steps can be implemented to improve productivity. The report, published by the Construction Productivity Taskforce, is a starting point that will allow the industry to begin to standardise the process of measuring site construction productivity that will ultimately lead to productivity improvements. According to the taskforce, findings from the pilot sites suggest productivity can be enhanced by use of digital technologies, improved management, upskilling and reduced waste.

• In a recent trading update Morgan Sindall said that despite ongoing inflation and supply chain issues, trading is continuing as normal. After revising its profit forecast upwards four times last year, the group expects its 2022 figures to be in line with previous expectations, with analysts forecasting a pre-tax profit of around £127m – up from £126m in 2021. Its construction and infrastructure businesses are on course to hit revised margin targets of between 3.5% and 4% in the medium-term while its booming fit-out arm “remains very strong”. The firm said:
  

• Lendlease has been appointed to deliver a £120m office retrofit scheme in Covent Garden. Over 80% of the original structure will be retained of 90 Long Acre, but the existing development will be expanded from eight to 10 storeys, delivering 260,000 sq ft of office space and 20,000 sq ft of amenities and public space. The scheme is all electric and is expected to be net zero carbon in operation. Two blue roofs will harvest rainwater, reducing water usage in the building by 50%. Northwood Investors, the developer, also said the decision to refurbish instead of building a new development would cut the embodied carbon in half saving 4,850 tonnes of CO2. G&T is providing CDM & Principal Designer support on the project.

• In recent weeks, a growing number of contractors have told clients that costs cannot be fixed, telling them that it is impossible to stick to agreed sums in an environment of constantly escalating inflation. Firms such as Osborne have stopped looking at fixed price jobs as bodies such as the CLC has warned that the lack of price continuity has made it difficult to quote for projects on fixed price contracts, and that more contractors are seeking to pass on price increases for materials that would otherwise erode their profit margins. Nobel Francis, economics director at the CPA also said:

• Landsec has redrawn its Portland House scheme In London’s Victoria to ‘materially reduce’ emissions and meet its carbon reduction targets. The original proposal to add a 14-storey block to the side of the existing 29-storey building has been scrapped. Instead, the existing space will be redeveloped, reducing the size of the overall scheme but materially reducing the targeted embodies carbon of the scheme to below 400kgCO2e/sqm. A greater proportion of the development cost is now made up of the existing building, helping to mitigate against further cost inflation risk. The project has been reworked under its ‘Build Well’ strategy – an initiative that is targeting a 50% cut in embodied carbon in half against a typical development by 2030. G&T is providing CDM & Principal Designer support on the project.

Materials & Commodities

• Construction material prices shot up by nearly 5% in March compared to the previous month on average. The BEIS ‘All Work’ material prices index was driven higher by sharp price rises for energy-intensive products, but particularly structural steel and rebar which rose by 19.2% and 31.6% in March. Prices for concrete, cement, and aggregates (which are expected to be in high demand due to a strong infrastructure pipeline of work) also continue to increase month-on-month. Prices for materials are projected to remain high and volatile in 2022 due to both the direct effects of the Ukraine crisis (i.e., the production of specific materials stemming from those countries) and its indirect effects (ie due to the conflict’s overall effects on the global supply chain and global energy prices).

• The CPA’s latest State of Trade Survey found that 100% of polled manufacturers had seen their raw material and energy costs increase over the past 12 months. More than four in five manufacturers said that they were paying higher wages. Input cost increases are affecting both light-side (eg doors and windows) and heavy-side products (eg steel, cement and bricks). Pass-through of these inflationary pressures seems unavoidable, particularly as near-term demand for materials remains strong given the high levels of activity currently on the ground.

• Commodity price indices such as S&P’s GSCI and IHS Markit’s Materials Price Index (MPI) reached all-time highs in early May. Although supply for most commodities is extremely constrained, commodity prices have showed some early signs of decline in recent days. Markets have been growing increasingly nervous about growth prospects with widening Chinese COVID-19 lockdowns (and its impact on supply chains) and higher interest rates in recent weeks. Prices for industrial metals such as aluminium, copper and even steel fell as markets reacted to a variety of factors including weaker demand signals from mainland China, rising interest rates, and the strength of the US dollar (which makes dollar denominated metals more expensive for buyers using other currencies). These factors are all putting downward pressure on commodity prices.

UK Economy

• In a recent hearing at the Treasury Committee of the House of Commons, Bank of England Governor Andrew Bailey acknowledged that inflation will likely hit a 40-year high of 9% in April and is set to move into double digits by the autumn. He noted that the “sequence of shocks, which have come one after another with no gaps between them, is almost unprecedented,” but explained that the recent inflationary pressures can largely be attributed to global inflationary factors (eg higher prices of goods bought from abroad) and rising energy input prices. In the BoE’s May 2022 Monetary Policy Report, the expectation is that inflation will begin to fall in 2023 as demand for goods softens and some of the production difficulties business are facing ease.

• A survey by Make UK found that three-quarters of British manufacturers are bringing back production to the UK in a “reshoring” push. These companies have increased the number of British suppliers in the past two years in response to the supply-chain chaos caused by the global pandemic and Brexit. Around half of the surveyed companies also said that they intend to further their UK supply base over the next two years as successive economic shocks, including the war in Ukraine, were forcing manufacturers to reverse the decades-long move to offshore supply chains as producers were increasingly facing delays in the arrival of components and materials. The breakdown in the critical just-in-time supply-chain processes meant UK companies were turning away from sources of lower-cost production in Asia to more resilient and predicable suppliers closer to home.

• Stagflation looms as UK economic growth grinded to a halt in February and March of this year. GDP declined by 0.1% between February and March and followed zero growth in the previous month. This came as consumer price inflation surged to its highest level in 30 years, resulting in the worst combination of surging prices and zero economic growth in 30 years. The cost-of-living crisis if forcing a cut-back in consumer spending with a knock-on effect on retail sales, raising the risk of recession this year.