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Output still in decline but optimism on the rise

6 Feb 23 UK construction activity has declined to its lowest level since the dark days of May 2020 but things are about to get better, the latest monthly survey of purchasing managers suggests.

House-building is currently the weakest performing sector of the UK construction industry
House-building is currently the weakest performing sector of the UK construction industry

At 48.4 in January, down from 48.8 in December, the S&P Global / CIPS UK Construction Purchasing Managers’ Index (PMI) –  measuring monthly changes in industry activity – posted below the 50.0 no-change threshold for the second month running.

Survey respondents noted that, while workloads had slowed, the general economic outlook appeared to have improved, with signs of a turnaround in sales enquiries.

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 and unfavourable market conditions.

Commercial activity (48.2) decreased for the first time in five months, reflecting softer demand and continued delayed decision-making on new projects. Meanwhile, civil engineering activity (49.7) is still in decline but the latest reading is its highest since June 2022.

Total new work decreased for the third time in the past four months, although only at a modest pace. Survey respondents cited particularly weak demand in the house-building sector.

In line with slowing activity, the rate of job shedding was the fastest for two years, with construction companies often commenting on hiring freezes and the non-replacement of voluntary leavers.

However, looking ahead, 43% of the survey panel expect a rise in business activity in 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. Several construction companies commented on improved sales pipelines and hopes of a turnaround in new orders. The survey found broad optimism that confidence would return to the housing market over the course of 2023, as borrowing costs stabilise.

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Tim Moore, economics director at S&P Global Market Intelligence, which compiles 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 simply 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."

John Glen, chief economist at the Chartered Institute of Procurement & Supply, said: "The wrecking ball of higher inflation and interest rates has knocked the UK’s residential building output to its weakest since May 2020 as stretched mortgage affordability impacted on the building of new homes. The other sectors also saw stagnation, so, it’s a construction conundrum, that builder optimism has risen to the highest for six months with the sector facing the second consecutive month of order books looking increasingly empty.

"This hopeful aspect could potentially be attributed to more enquiries filtering through to building companies which could develop into concrete orders in the coming months alongside the economy showing small, incremental improvements. Delivery times and material availability also improved which was a boost for firms working on ongoing projects.

"The continuing price pressures for energy and wages still remain a concern, along with the highest level of job shedding for two years and building skills remaining in short supply. Evidently, there are still roadblocks ahead, but we should have faith that the sector can see a path through for better outcomes in 2023 after languishing in contraction in the last few months."

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