Most of us would welcome a drop in the headline rate of inflation, but we must be careful what we wish for. Deflation – or falling prices – is not healthy either, resembling instead the slowing beeps of a monitor as the patient slips away.
The construction sector could certainly use some life support. Recent drops in the prices of raw materials and razor-keen quotes from contractors and subcontractors should not be mistaken for vigour. They are, instead, the strangled gasps of desperation.
An evaporating pool of new work has left suppliers looking for any kind of contract to keep them afloat. And as night follows day, reckonings will come further down the line as loss-making bids trigger corner-cutting, variations, disputes and the spectre of insolvency.
The latest construction sector Purchasing Managers’ Index (PMI), compiled by S&P and the Chartered Institute of Procurement & Supply, paints today’s bleak picture in grim black and white.
Commenting on the survey for October, S&P Global Market Intelligence economics director Tim Moore said: “Total new work continued to fall more quickly than at any time since the initial pandemic lockdown period, which contributed to shrinking demand for construction products and materials during October. Competitive pressure on suppliers to pass on lower commodity prices resulted in the fastest decline in input costs since August 2009. Subcontractors meanwhile cut their charges for the first time in more than three years in response to a further downturn in workloads.”
Other experts weighed in with similarly grim assessments. Giulia Bellicoso, assistant economist at Capital Economics, highlighted a 20% year-on-year drop in housebuilding starts. “Things are unlikely to get any better in the near term,” she added. “Housebuilders are scaling back planned starts [and] except for during the pandemic, it’s the first time that’s happened since 2009.”
Toby Banfield, financial restructuring partner at PwC UK, focused on what the numbers in the latest PMI data reveal about underlying sentiment: “The degree of optimism signalled by the survey in October was the lowest so far this year.” And in no way lightening the mood, he added: “Increasingly, developers and major contractors are looking at the resilience of their supply chains and considering contingency plans in the event a key contractor was to fail.”
There was not much in this week’s King’s Speech to raise spirits among those affected by the industry-wide slowdown. The King’s monotone delivery matched a lack of life-affirming material, with proposed legislation either irrelevant to our sector or already priced in.
As a result, expectant eyes will now turn to the Autumn Statement, due to be delivered by chancellor Jeremy Hunt on 22 November. Stimulus for housebuilding will surely be non-negotiable. Expectations include a second extension to the government’s mortgage guarantee scheme for 95% loans, currently due to end on 31 December, looser limits for first-time buyers drawing on Lifetime ISAs, stamp duty rebates for greener homes and a potential return of the Help to Buy loan scheme.
It will take a strong zap from the economic defibrillator to jolt development back to life. Let’s hope Hunt has something powerful up his sleeve.
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