Further fall in construction output as expectations rise

January sees fastest fall in output since May 2020 but expectations for year ahead rebound considerably

UK construction companies reported another downturn in business activity during January, largely reflecting weaker client demand and fewer new projects starts in recent months. In contrast, business expectations regarding the year ahead rebounded considerably since December 2022, with confidence reaching its highest level for six months. S&P Global / CIPS UK Construction Purchasing Managers’ Index (PMI) survey respondents noted that the general economic outlook appeared to have improved, while some cited tentative signs of a turnaround in sales enquiries.

At 48.4 in January, down from 48.8 in December, the headline seasonally adjusted PMI – which measures month-on-month changes in total industry activity – posted below the neutral 50.0 threshold for the second month running. The latest reading signalled a modest reduction in overall business activity and the rate of decline was the fastest since May 2020.

House building (index at 44.8) was the weakest-performing category of construction output in January, with the rate of contraction the steepest since May 2020. Lower volumes of residential work were attributed to rising borrowing costs, unfavourable market conditions and greater caution among clients.

Commercial activity (48.2) decreased for the first time in five months during January, reflecting softer demand and delayed decision-making on new projects. Meanwhile, civil engineering activity (49.7) was close to stabilization, with the latest reading the highest seen since June 2022.

Looking ahead, around 43% of the survey panel anticipate a rise in business activity over the year ahead, while only 17% forecast a decline. The resulting index signalled a sharp rebound in business expectations from the 31-month low seen in December 2022. Construction companies often commented on improved sales pipelines and hopes of a turnaround in new orders. Some firms cited optimism that confidence would eventually return to the housing market over the course of 2023, assisted by a stabilization in borrowing costs.

Tim Moore, economics director at S&P Global Market Intelligence, who compile the survey, said: ‘A sharp and accelerated decline in house building activity led to the weakest UK construction sector performance for just over two-and-a-half years in January. Construction companies once again cited a headwind from lacklustre market conditions, rising interest rates and fewer new project starts in the residential segment. Commercial building also slipped into contraction as the subdued UK economy weighed on business investment.

‘However, there were positive signals for longer-term prospects across the construction sector, with business activity expectations staging a swift rebound from the low point seen last December. For some firms, the recovery in business optimism to its highest for six months was driven by signs of a turnaround in new sales enquires at the start of 2023. Other construction companies noted gradual improvements in the general economic outlook and hoped that confidence would return at a later stage this year to alleviate the current lack of momentum in the house building sector.’