No double dip in construction
- The rise in the headline construction PMI in November showed that the industry continued to recover even as overall economic activity probably contracted again. But builders’ optimism that this will continue for the foreseeable future seems misplaced to us. The slump in housing transactions and the further slide in commercial property capital values we expect in 2021 suggests that the recovery in construction will peter out next year.
- The latest GDP data showed there was still a 7.3% shortfall in construction output compared to its pre virus level in September. So the tick up in the headline construction PMI from 53.1 in October to 54.7 in November indicates that, having been spared from the second national lockdown restrictions, construction output was able to continue to recover.
- The increase in the construction PMI on the month appears to have been due to a rebound in civil engineering activity after a drop in October. But more broadly, housebuilding has been the main driver of the recovery. While the housing activity index slipped from 64.4 to 59.2 in November, it remains much higher than the commercial and civil engineering activity balance as housebuilders benefit from the ongoing boom in sales and prices of residential property.
- The recent strength of the housing activity PMI suggests that housing starts will make a swift recovery. (See Chart 1.) And the rise in the new orders balance from 56.1 to 58.1 implies that construction will continue to benefit from the mini-boom in the housing market in the near term. But the rise in the future activity index from 65.7 to 67.2 seems over optimistic to us. Our forecast that the end of the stamp duty cut in March will lead to a slump in transactions (see here) and a dip in prices (see here) points to the recovery in housebuilding petering out before it reaches its pre-virus level.
- Meanwhile, the commercial construction sub-index fell slightly from 52.1 in October to 51.9 in November. And the rise in the future activity index is consistent with upbeat expectations in the Q3 RICS Construction survey. But like in the residential sector, that optimism appears misplaced. We think commercial construction will remain relatively weak. After all, we think capital values will not start to recover until 2022, which will mean developers will be in no hurry to start new projects. (See here.)
- Construction companies’ optimism might also be partly based on the arrival of a vaccine. But even as GDP rebounds, we think that there is a further rise in unemployment to come which will weigh on the housing market and office occupier demand. (See here.) With house prices and capital values likely to dip as a result, the recovery in construction is likely to disappoint construction firms’ lofty expectations.
Chart 1: IHS Markit/CIPS Housing Construction PMI and Private Housing Starts
Sources: IHS Markit/CIPS, MHCLG, NHBC
Andrew Wishart, Property Economist, firstname.lastname@example.org, +44(0)7427 682 411
Prohad Khan, Property Economist, email@example.com