Markit/CIPS UK Construction PMI shows increase in output

Confidence in 12-month outlook at highest level since 2004.

This morning saw the release of June’s Markit/CIPS UK Construction PMI and the results showed a buoyancy of increased business activity and confidence in the industry.

Following the PMI of 55.9 in May, this has accelerated in June to 58.1, which is also the biggest increase in construction activity since February’s index.

Strong order books and more demand are seen as reasons for the growth in output from survey respondents. The latest figures show further encouragement by the fact that new work is at its highest level since October 2014.

Although activity in the residential sector is the fastest growing in June, the acceleration from May seems to be driven by activity growth in the civil engineering and commercial sectors since May.

Another feather in the cap of the survey is that the level of business optimism over the next 12 months is at an 11-year high with only 4% of the survey panel expecting a decline in output.

In contrast, 62% have forecast an increase, with companies believing there will be demand in residential projects, perhaps because of the Government’s push to increase new starts in housing.

Business confidence has also come about because companies expect to be tendering on commercial developments in the next 12 months, along with opportunities in infrastructure projects.

The Author of the Markit/CIPS Construction PMI, Tim Moore, believes that the removal of General Election uncertainty is a reason for the growth, but not the only one, saying: “The extent of the recent rise in construction optimism is partly down to relief that pre-election uncertainty has now passed, but it also suggests that firms are infused with confidence that underlying demand will continue to recover.”

The twin surge in confidence and output shown in the PMI has resulted in the fastest level of job creation in construction this year.

Purchasing activity in June from construction companies also accelerated, mainly as a result of the greater workloads, which was also a reason for job creation.

It all points to a very positive outlook in the construction industry.

Kathleen Brooks, Research Director at www.cityindex.co.uk, says that this “respectable” level of PMI in June points to the industry contributing positively to GDP.

She said: “The increase in the index to 58.1 from 55.9 is a respectable level and suggests that the construction sector will make a decent contribution to Q2 GDP.

“In contrast to the strong PMI figure, housing prices slipped to their lowest annual level since June 2013, according to Nationwide. This could spell good news for the construction sector as falling house prices may be a sign of growing demand.

“Overall, we expect construction to remain supported over the coming months.”

Kalpana Padhiar, the risk underwriting manager and construction specialist at Euler Hermes, believes that despite this buoyancy in the industry, there must be caution to avoid a repeat of some recent examples of companies going into administration or insolvency.

She said: “With the industry already buoyant following the revised 2015 growth forecast to 5.7%, June’s rise in output growth and surge in business confidence is further evidence of the momentum we’re currently seeing in the market.

“But despite the strong performance across the sector, the recent surprise failure of Longross Construction Ltd and other high profile administrations at Anglo Holt, GB Group Holdings and GB Building Solutions Ltd this year highlight the significant risks still present in construction.

“Even with confidence high, we would still urge caution and encourage companies to make sure they are protected against a potential domino effect should more businesses fail.”

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