UK construction companies indicated a strong improvement in business activity expectations in January, with optimism reaching its highest level for two years despite an ongoing decline in current output levels and a marginal fall in incoming new work.
The latest report from the headline S&P Global UK Construction Purchasing Managers’ Index (PMI) found that its survey respondents often cited hopes of a turnaround in client demand due to looser financial conditions and more favourable underlying economic prospects.
PMI breakdown
The latest PMI registered 48.8 in January, up from 46.8 in December and the highest reading since August 2023. However, the index remained below the crucial 50.0 no-change threshold for the fifth month running and signalled a moderate decline in total industry activity.
Civil engineering was the best-performing segment in January (index at 49.8), with output levels close to stabilisation. Commercial activity also showed some resilience, with the respective index pointing to only a marginal rate of decline (49.1).
Meanwhile, house building continued to fall sharply at the start of 2024 (index at 44.2). Survey respondents noted subdued demand conditions and a lack of work to replace completed projects. The rate of contraction for residential activity nonetheless eased to the least marked since March 2023.
New work
January data indicated a reduction in total new work for the sixth consecutive month, but the pace of decline was only marginal and the weakest seen over this period. Companies reporting a fall in new business generally cited delayed decision-making among clients and subdued market conditions, especially in the house building segment.
Despite subdued order books, latest data signalled a sharp upturn in business activity expectations. Around 51% of the survey panel forecast a rise in business activity during the year ahead, while only 12% predict a decline. This pointed to the highest level of business optimism since January 2022. Lower borrowing costs and higher consumer confidence were cited as factors likely to boost construction activity over the course of 2024.
Staff hiring and input costs
Construction companies remained cautious about staff hiring in January. Total employment numbers fell fractionally, while sub-contractor usage was broadly unchanged since the previous month. Rates charged by sub-contractors increased at the fastest pace since September 2023, despite a robust and accelerated improvement in availability.
Demand for construction inputs softened for the fifth consecutive month in January, with survey respondents commenting on weak demand and ongoing efforts to minimise inventory holdings. Meanwhile, suppliers’ lead times shortened again as an improved balance between demand and supply helped to reduce delivery delays.
January data indicated a renewed increase in purchasing prices across the construction sector, following three months of falling costs. The latest survey signalled a solid rise in input costs that was the fastest since May 2023. Some firms commented on higher prices paid for imported items, especially those that had incurred additional shipping costs.
Industry comments
Commenting on the report, Joe Sullivan, construction and real estate specialist at accountancy firm MHA said: “The rise in today’s construction PMI data is positive news and a sign that there is renewed optimism among construction companies. However, the PMI data remains below 50.0 as the industry continues to battle with challenges on multiple fronts. Although the drop in inflation is helping with input costs, interest rates remain stubbornly high, and the further announced increase in minimum wage in April, coupled with the ongoing shortage of labour in some regions will continue to bite in the short-term.
“The Budget next month would be an ideal opportunity for the government to announce a medium to long term commitment for the sector on both investment and planning but sadly we are instead expecting more short term focussed announcements.
“Two quick wins would be first to supplement existing support making affordable and entry level housing more accessible and second to go further, building on changes to permitted developments, and make it cheaper to repurpose non-residential buildings will help to give the sector some confidence.
“For the last few months, our commercial clients have been telling us that pipelines are very healthy, but work keeps getting deferred, presenting significant problems for cash flow and the overall financial health of those who are impacted throughout the supply chain. However, all could be set to change as customer demand returns.
“Today’s encouraging news highlights that the construction industry is on the way up following a number of months in the doldrums. An improvement in the background economic conditions will engender confidence and the situation could improve further towards the middle of the year.”
