The Construction Purchasing Managers’ Index (PMI) for December 2022 fell into negative territory for the first time since last August and to its lowest reading since May 2020.
A similar trend was reported for new orders, with its steepest fall for more than two-and-a-half years.
Concurrently, sentiment among construction firms towards the year ahead outlook for activity dipped into negative territory for only the sixth time on record, reflecting fears around the near-term economic outlook, the survey authors said. Pessimistic expectations were reflected in the first round of job shedding in the construction sector since January 2021.
The headline seasonally adjusted S&P Global / CIPS UK construction PMI was 48.8 in December, down from 50.4 in November – anything below 50.0 indicates a contraction in construction sector output.
Although commercial construction activity continued to rise in December, at 50.3 its growth was marginal and outweighed by contractions across the residential and civil engineering sectors. House-building activity (48.0) declined for the first time since July 2022; civil engineering recorded a sixth consecutive monthly contraction in output (46.8).
December data also highlighted a reduction in new orders placed with UK constructors, following a modest uplift in November. According to survey respondents, the fall was driven by weak client demand, linked in turn to higher prices charged.
Confidence amongst constructors dropped into negative territory for the first time since the initial covid-19 wave and for only the sixth time on record. Downbeat sentiment was attributed to expectations of a recession and poor demand conditions, as well as inflationary pressures.
Average lead times for inputs lengthened, with delays the most severe since last June. Shortages and shipping issues were cited as the cause. Costs faced by construction companies continued to increase, with energy, materials, fuel and import costs all cited by panellists. However, the rate of inflation was the weakest for two years.
Lewis Cooper, economist at S&P Global Market Intelligence, which compiles the survey said: "The UK's construction sector registered a relatively poor finish to 2022, with business activity falling into decline following a three-month growth sequence amid the fastest contraction in new work since the initial pandemic period in May 2020. Companies cited weak client demand, driven partly by higher prices amid ongoing inflationary pressures.
"Commercial construction activity remained the only bright spot, though here the rate of growth came close to stalling, with the overall contraction led by a further sharp decline in
civil engineering and the first fall in residential construction activity since last July.
"The challenging environment in December was subsequently reflected in pessimism amongst firms towards activity levels over the coming year, with business confidence downbeat for only the sixth time since the survey began in April 1997.
"With the outlook turning negative, staffing levels declined for the first time since the start of 2021 in December. Though panellists primarily attributed the fall to the non-replacement of leavers, the data show that companies are preparing to face significant challenges in the months ahead."
John Glen, chief economist at the Chartered Institute of Procurement & Supply, said: "The construction sector was stuck in the mud in December with the steepest fall in activity since the beginning of the pandemic in May 2020 and a similarly fast drop in pipelines of new work.
"House building saw a notable change of direction, with a mix of higher inflation for raw materials and transportation and the squeeze on affordability rates for mortgages resulting in fewer house sales. The sector subsequently fell back into contraction for the first time since July. Civil engineering, responsible for larger projects, continued to be the weakest performer again, with a sixth month in the doldrums as uncertainty about the UK economy reared its ugly head again and customers hesitated. Supply chain managers reined back spending on materials with the sharpest fall in buying activity for over two-and-a-half years as a result of this poor demand.
"Optimism remained very flat and at one of the starkest rates in the survey’s history. Builders were reining back on recruitment unconvinced there will be enough growth in the UK economy in 2023 to justify additional expenditure when margins remained so squeezed. Builders are fast running out of the resilient spirit maintained over the last couple of years as the blocks to success piled up and the winter of discontent with high inflation, strikes and shortages continues."
Mark Robinson, chief executive of local authority procurement agency Scape, said: “After a drop off in activity towards the back end of last year, December’s figures are further evidence of the recession strengthening its grip on the economy.
“The construction industry is braced for a tough year and, while there are positive signs that inflation has peaked, increased material costs will undoubtedly continue to shape the plans of developers and local authorities – that latter of which will be confirming their annual budgets this month.
“Maintaining clear, positive dialogue in 2023 will be crucial if projects are to progress uninhibited, and calm and cautious management will likely pay dividends further down the line when purchasing decisions are ready to accelerate again.”
Fraser Johns, finance director with regional building contractor Beard, said: “While many within the industry would have been encouraged by the past few months of marginal growth in activity, news of a poor December and end to the year will come as no surprise given the deluge of challenges the sector is facing.
“The higher cost to borrow, tighter access to credit and wider inflationary pressures have had a major impact on client confidence. Contractors, who have seen higher material costs erode margins are now seeing the market for new work tighten, making tenders more competitive. While those with strong balance sheets may be able to stomach that, those already at risk face a difficult 12 months ahead.
“A rise in commercial construction activity – albeit only marginally, is certainly a positive to take from a challenging month. However, it may not be enough to rescue the general optimism of the sector, especially as civil engineering and residential construction stumbled. While resilience may be tested, the mantra has to be to “control what we can control” moving forward, working closely with developers, clients and stakeholders.”
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