Confidence building
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
After a weak start the construction sector is bouncing back. Adverse weather conditions hindered progress early in the year, but house building and commercial work is picking up again.
The construction industry plays an important role in our economy, providing jobs, assisting national goals of providing shelter and building vital infrastructure necessary to support growth.
Evidence supporting improving construction activity comes from the UK Construction Purchasing Managers’ Index (PMI). The index level increased to 53.1 from May’s 52.5 with any reading above 50 indicating the sector is expanding.
UK Construction PMI
Source: Bloomberg, data as of July 2018
This is the third month in a row that the construction index has shown an improvement. Duncan Brock, group director at the Chartered Institute of Procurement and Supply, which co-produces the survey along with HIS-Markit said, “Despite being hampered by economic uncertainty, firms reported an improved pipeline of work as clients committed to projects”.
One area in the spotlight is new home building. Orders for new homes rose at the fastest rate since 2007, indicative of a healthy housing market.
New Housing Orders
Source: ONS, data as of July 2018
Housebuilding giants Persimmon and Bovis Homes also signalled robust housing conditions. Persimmon reported higher first-half sales with a 5% rise in revenues in the six months to the end of June. They also revealed that the average selling price of private homes is now £236,000, a 2% increase.
We know from economic models that higher house prices tend to cause positive wealth effects: Consumer confidence and spending increase when people feel wealthier. Furthermore, a healthy housing market encourages a positive spiral of greater investment with yet more homes being built. According to Persimmon, “Consumer confidence remains resilient in our market and attractive mortgage products provide compelling support to purchasers of new homes,”. Bovis Homes also added to the cheer by stating “housing market fundamentals remain robust, with good demand for new homes across all our regions and underlying pricing remaining firm”.
The chart below illustrates how consumer confidence is moving out of the doldrums, picking up pace since the turn of the year.
UK Consumer Confidence
Source: Bloomberg, data as of July 2018
Finally, a more buoyant construction sector, with rising house prices, should improve spending, increase economic growth, boost investment and contribute to lower levels of unemployment. Whilst these are promising signals for the future of UK construction, we caution that the sector can often be volatile. Sentiment will be swayed by the Brexit agreement, just 9 months away, but as we have seen before, the business of business is to get going.
