A broad-based strengthening in construction activity pushed up the construction PMI to a six-and-a-half-year high in March. Strong housing and logistics development will continue to support construction, but the boost from delayed completions of office space is likely to be fleeting.
Strongest growth in construction activity since 2014
- A broad-based strengthening in construction activity pushed up the construction PMI to a six-and-a-half-year high in March. Strong housing and logistics development will continue to support construction, but the boost from delayed completions of office space is likely to be fleeting.
- The increase in the headline construction PMI from 53.3 in February to 61.7 in March took it to its highest level since 2014 and suggests that construction activity has now made a full recovery from the pandemic. (See Chart 1.) The improvement was broad based across the sectors. The civil engineering balance rose from 47.5 to 58.0 (the highest since October 2014), the commercial balance from 53.0 to 62.7 (highest since June 2014), and the housing balance from 56.9 to 64.0 (highest since July 2020).
- According to comments from survey respondents the rise in the commercial sub-index can partly be explained by the continuation of delayed leisure, hospitality and office projects from last year. Indeed, London is set to see almost 6.5m. sq. ft. of office space complete this year, up from 4.5m. sq. ft. in 2020. It is worth noting, though, that commercial construction output was 11% below pre-virus levels in January compared to a 3% shortfall in overall construction, so the improvement is from a low base.
- Looking ahead, the recovery in commercial construction outside the industrial sector is likely to be underwhelming. After all, we think office and retail values will continue to fall this year, so developers are unlikely to begin many new projects in those sectors. By contrast, industrial capital values have seen strong growth in recent months and Knight Frank report that 40m sq. ft. of industrial space will complete this year, up from 20m. sq. ft. in 2020.
- Meanwhile the strength of the housing activity balance confirms that house builders are increasing output in response to the ongoing strength of the housing market and low inventory due to unexpectedly high sales since Q2 2020.
- The strength of activity came despite rising cost pressures due to strong demand for construction inputs while supply has been disrupted. The input prices index rose from 73.0 to a twelve-year high of 77.8 and delivery times continued to lengthen.
- Overall, the strength of the PMI in March suggests that construction output has now fully recovered, and the forward-looking balances of the survey suggest that strength will be sustained in the near term. Further ahead, unwillingness to begin new office and retail developments is likely to become a headwind.
Chart 1: IHS Markit/CIPS Construction PMI & Construction Output
Sources: IHS Markit/CIPS, ONS