Construction industry heading towards tipping point as PMI drops below 50

According to the latest PMI data by IHS Markit and CIPS, the headline construction PMI dropped below 50 to 48.8 in December 2022, down from 50.4 in November 2022, continuing the previous downward trend, with activity and new work declining at the fastest rate since May 2020.

New orders also fell to 48 in December, indicating that businesses are heading towards a tipping point as the current economic climate exacerbates challenging market conditions such as a shrinking supply chain, cash flow concerns and growing labour shortages.

Kelly Boorman, partner and national head of construction at RSM UK, said: ‘The latest fall in the headline construction PMI for December to 48.8 continues to show the impact of the recession on the industry, which has also seen a significant fall in new works, reflecting difficult times ahead. With business optimism at a two-and-a-half-year-low in November, this has plummeted further, given the reduction in pipelines and continued increase in material and labour prices, coupled with raising debt and working capital restraints. Adverse weather conditions have also played a part in this month’s fall, bringing projects to a halt. Although contracts are being tendered for and margins are looking better, the pipeline is still very slow, suggesting new works and business confidence will continue to fall in Q1 2023.

‘This bleak picture is likely to result in a ramp up in administrations at the start of 2023, project start dates continue to be significantly delayed and repriced due to fragility in the supply chain. Managing cash flow and protecting those supply chains is a key focus for main contractors right now; to mitigate risk and ensure they have enough working capital for projects to be completed.

‘With the housing market plummeting in November 2022, there’s going to be a tipping point where it has to pick up. However, its revival will be dependent on future government infrastructure projects and public spending. But, with a weakened supply chain, does the industry have the right resource to deliver on such projects? Looking ahead into 2023, businesses will be calling for government to commit to infrastructure project budgets to stimulate much needed market recovery for the Construction industry.

Thomas Pugh, economist at RSM UK, said: ‘The drop in the IHS/Markit Construction PMI to 48.8 illustrates the impact that higher interest rates are having on the construction sector. Housing activity has been hit especially hard as higher interest rates raise the possibility that house prices will fall by up to 10% over the year. Indeed, there is clear evidence of a significant slowdown in the housing market. Approvals for house purchases, an indicator of future borrowing, decreased significantly to 46,100 in November, from 57,900 in October and a peak of 74,425 in August.

‘Given interest rates are likely to continue to increase to around 4.5% early this year and the recession is likely to deepen, output in the construction industry is likely to fall further. We expect GDP as a whole to fall by about 0.3% q/q in Q4 2022, which would confirm that the UK economy is in recession. We expect the recession to last until Q3 2023 with a 2% drop in GDP making it comparable to the early 1990s recession.

‘However, there is some cause for optimism. The input prices and subcontractors’ rates balances both fell, indicating that pricing pressure is becoming less extreme. This chimes with our view that inflation will rapidly drop over the course of this year, easing the cost-of-living crisis and setting the stage for a rebound in growth in 2024.’