Confidence strong despite sharp decline in construction, PMI reveals

A sharp decline in house building led to the weakest UK construction performance for just over two-and-a-half years in January, but business optimism still reached a six month high, according to January’s PMI survey results.

Weaker client demand and fewer new project starts in recent months also contributed to the rate of decline being the fastest since May 2020.

In contrast, business expectations regarding the year ahead rebounded considerably since December 2022, with confidence reaching its highest level for six months. 

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 S&P Global / CIPS UK Construction Purchasing Managers’ Index® (PMI®) – which measures month-on-month changes in total industry activity – posted below the neutral 50.0 threshold for the second month running. 

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 stabilisation, with the latest reading the highest seen since June 2022.

Mirroring the trend for business activity, latest data indicated that employment numbers decreased for the second consecutive month in January. 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 due to softer demand.

January data also pointed to the sharpest fall in purchasing activity since May 2020. Lower demand for construction products and materials helped to alleviate pressures on supply chains at the start of 2023.

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. 

Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey said: “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."

Dr John Glen, chief economist at the Chartered Institute of Procurement & Supply, said: "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."

Mark Robinson, group chief executive at public sector procurement specialist SCAPE, said that public sector investment is going to be crucial if the industry – and the economy – is to return to growth quickly, thanks to the confidence it provides around future workloads.

He said: “A continued decline in construction activity is concerning, yet no surprise given recent economic forecasts. However, local authorities will need to maximise the use of existing funding pots in order to encourage major regeneration and attract investment that is crucial to the future of the UK’s towns and cities.”

PMI data was collected between 12-30 January 2023.