UK construction industry records highest growth in six years thanks to house price boom

Eurozone output was less rosy with France leading the bloc's decline

A pedestrian passes construction hoardings decorated with British Union Jack flags in London, UK. Construction PMI rose to 54.7 in November from 53.1 in October. Bloomberg

Britain’s construction industry grew faster than expected in November, boosted by the strongest orders in six years amid a surge in house prices.

The IHS Markit/CIPS construction Purchasing Managers’ Index (PMI), considered a good gauge of the sector's health, rose to 54.7 in November from 53.1 in October, its strongest level since July with new orders the highest since November 2014. A reading above the 50.0 level indicates growth, while a figure below shows a contraction.

“UK construction output stayed on a recovery path in November and there were signs that the main growth driver has transitioned from catch-up work to new projects,” said Tim Moore, IHS Markit’s economics director.

"House building was once again the stand-out performer, while a return to growth for civil engineering contributed to the rise in the headline PMI during November. Commercial construction lagged behind the recovery seen elsewhere in the sector amid subdued demand for office space, retail developments and other corporate projects hit by the pandemic.”

The situation was less rosy in the eurozone, where construction continued to decline with a PMI reading of 45.6 in November, up slightly from 44.9 in October. The decline in activity was widespread across the three largest eurozone economies, with French building firms recording the most marked contraction, as well as a strong fall in Germany. Output in Italy fell only fractionally in November.

"The eurozone construction sector continued to report a decline in activity during November, accompanied by a quicker fall in new orders, as steep contractions in France and Germany weighed on the region’s performance,” said Usamah Bhatti, economist at IHS Markit.

“Businesses in the bloc also lowered staffing levels for the ninth month in a row although the rate of job shedding eased in the latest survey period.”

Construction businesses in the bloc are pessimistic for the year ahead due to the second wave of Covid-19 and the lack of projects coming to tender over the coming months, IHS Markit said.

The more buoyant mood in Britain's equivalent sector was driven by a sharp rise in house prices since the end of June, thanks to pent-up demand following the first lockdown and UK finance minister Rishi Sunak's Stamp Duty Land Tax Holiday, which runs until the end of March.

British house prices rose 6.5 per cent in November year-on-year, the fastest rate since January 2015, with the average house price now £229,721, according to the Nationwide House Price Index.

Lenders have approved the most mortgages since 2007, as buyers upsize to larger homes in case of future lockdowns. In turn, this has spurred housebuilders to commit to more projects, and November also brought the first growth in civil engineering activity since July.

Official data showed Britain’s monthly construction output almost halved in April during the first lockdown, and in September it was still 10 per cent below the level it hit a year earlier. While the November reading indicated a solid increase in total construction output, the rate of growth remained softer than the peak seen in July.

Employment in the sector also continued to fall as firms looked to reduce overheads, though by the smallest amount since February, and the disruption to supply chains resulted in a sharp increase in average cost burdens.

"Despite this accelerated improvement overall, the employment picture remained cheerless. In a bid to dampen down the effects of the sharpest rise in input costs since April 2019, builders were reducing headcounts to keep their own heads above water leading to another fall in job numbers,” said Duncan Brock, group director at the Chartered Institute of Procurement & Supply.

Looking ahead, half of those polled in the survey expect a rise in UK business activity during the year ahead, the strongest degree of business optimism across the sector since January.