January sees slight reduction in UK construction output

All eyes on budget for news on future work pipelines, after January decline ended seven-month period of expansion.

Industry leaders are hoping that next month’s budget will bring welcome news on future work pipelines after UK construction output in January saw a marginal decline that ended a seven-month period of expansion. 

The latest PMI survey, compiled by IHS Markit, also signalled a slowdown in new order growth to its weakest since June 2020. Construction companies often noted that the third national lockdown and concerns about the near-term economic outlook had led to greater hesitancy among clients, especially for new commercial projects.

Meanwhile, transport shortages and delays at UK ports resulted in another severe downturn in supplier performance during January. Around 45% of the survey panel reported longer lead times for the delivery of construction inputs, while only 1% noted an improvement.

At 49.2 in January, down from 54.6 in December, the headline seasonally adjusted IHS Markit/CIPS UK Construction Total Activity Index signalled a decline in overall construction output for the first time since May 2020. However, the rate of contraction was only marginal.

A renewed fall in commercial activity (index at 46.2) and another drop in work on civil engineering projects (45.0) stood in contrast with strong growth in the residential category (57.1). Nonetheless, the latest increase in house building was the slowest since the rebound began in June 2020.

New business volumes rose slightly in January, but the rate of expansion lost considerable momentum since the end of 2020. Employment numbers dropped in January, which reversed the marginal expansion seen during December. Job cuts were primarily linked to the non-replacement of leavers following project completions.

Purchasing activity increased for the eighth consecutive month in January, although the rate of growth eased further from November's recent peak. Strong demand for construction inputs and ongoing transportation issues resulted in the steepest downturn in supplier performance since May 2020.

Construction companies continued to experience intense cost pressures, driven by rising prices for plaster, steel and timber. The overall rate of input price inflation accelerated to its highest for just over two and a half years.

Finally, latest data indicated that business expectations for the year ahead remained positive in January. However, the degree of confidence eased to a three month low.

Tim Moore, economics director at IHS Markit, which compiles the survey, said: "The latest survey highlighted that construction companies have become more cautious about the business outlook. Output rebounded quickly after stoppages on site at the start of the pandemic, but hesitancy among clients in January and worries about near-term economic conditions resulted in a dip in growth expectations for the first time in six months."

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: "Progress in the sector feels like two steps forward and one step back for builders, as the shortages and the longest delays in supply chains since May affected optimism and led to the sharpest rise in building costs since June 2018."

Hannah Vickers, chief executive of the Association for Consultancy and Engineering (ACE) said: “The stop/start nature of our recovery continues as we move into a new calendar year but the ongoing uncertainty remains difficult for many working in the industry. The chancellor has an opportunity to provide some extra support for the sector at the budget in March, as well as providing more clarity and progress on the pipeline of projects that is fundamental to business confidence in our sector.”

Mark Robinson, group chief executive at public sector procurement specialists SCAPE, said: “As overall output growth declines, the road to recovery remains uncertain. Attentions are naturally beginning to turn to next month’s budget announcements, where contractors will be hoping for a continued commitment to public infrastructure spending, as well as concessions around issues such as an extension to the VAT deferred payment scheme to support their cashflow. Despite the challenges at the start of the year, the budget will undoubtedly help improve the sector’s outlook for 2021 and provide a timely boost for those businesses beginning to see their financial resilience tested.”

Ragene Raithatha, director in the construction & infrastructure team at DWF, said: "With various Coronavirus vaccines now being rolled out, there is a real hope among the industry that whilst we may have begun 2021 in a national lockdown, we are optimistic it can become a year of recovery, as the workforce get back out to work in greater numbers."

Max Jones, director in Lloyds Bank’s infrastructure and construction team, said: “Perhaps more than ever it feels like the fortunes of the largest contractors are reliant on government pressing go on infrastructure projects designed to help ‘level up’ the economy and bolster Britain’s green credentials. In that sense construction bosses will be watching next month’s budget closely in the hope that the chancellor announces a raft of shovel-ready schemes.”

January’s PMI data was collected between 12-28 January 2021.

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