The fall in the headline construction PMI to its lowest level since May shows that the recovery in activity was waning even before the second lockdown began. Admittedly, construction sites will remain open this time around. But with the economic outlook deteriorating, residential and commercial construction is likely to remain weak next year.
Recovery in construction waning
- The fall in the headline construction PMI to its lowest level since May shows that the recovery in activity was waning even before the second lockdown began. Admittedly, construction sites will remain open this time around. But with the economic outlook deteriorating, residential and commercial construction is likely to remain weak next year.
- The fall in the headline construction PMI from 56.8 in September to 53.1 in October suggests that the recovery in the sector is slowing despite the industry being spared from new virus restrictions. The civil engineering index fell most sharply, but the commercial and housing activity balances also eased lower.
- Admittedly, the forward-looking balances in the survey were encouraging. The future activity balance improved from 63.6 in September to 65.7 in October. And there were also signs that strong activity had led to delays to deliveries of materials, and to suppliers and subcontractors hiking their prices. But we doubt this will be sustained given the renewed downturn in overall economic activity due to COVID-19.
- Indeed, the commercial construction sub-index fell from 54.5 in September to 52.1 in October, leaving it at its lowest level since May. While the outlook for commercial remains positive, we think the recovery in commercial construction will be limited. After all, another national lockdown will put further pressure on occupier demand. This also poses a growing downside risk to all-property capital values and could mean that any recovery in values will be pushed into 2022. (See here.) As a result, we expect that commercial developers will be in no rush to begin new projects.
- Meanwhile, the housing activity PMI remained at a high level, consistent with a further recovery in housing starts. Having fallen 59% y/y in Q2, data from NHBC suggests that starts were down just 7% by October. And despite easing from 63.4 in September to 62.4 in October, the housing activity PMI indicates that housing starts postponed due to COVID-19 earlier in the year are now going ahead. (See Chart 1.)
- But the boost to starts from builders making up for lost time will be tempered by the deteriorating economic outlook in the coming months. The second lockdown and the likelihood of severe virus restrictions in early 2021 too will hamper the recovery and cause the unemployment rate to surge to 9% next year. (See here.) There is a growing possibility that house prices fall as a result. (See here.) And the Help to Buy Equity Loan scheme being restricted to first time buyers from April will deal demand for new homes an additional blow. As a result, we suspect the recovery in housing starts will peter out before they reach their pre-virus level.
Chart 1: IHS Markit/CIPS Housing Construction PMI and Private Housing Starts
Sources: IHS Markit/CIPS, MHCLG, NHBC
Andrew Wishart, Property Economist, email@example.com
Prohad Khan, Property Economist, firstname.lastname@example.org