Cautious optimism as construction recovery continues in December

The UK construction sector ended a challenging 2020 on a positive note, with the latest monthly PMI figures showing a sustained rebound in business activity during December.

Output expansion maintained for the seventh month in a row, employment returned to growth amid a strong rise in new orders and optimism across the construction sector was at its highest since April 2017.

The headline seasonally adjusted IHS Markit/CIPS UK Construction Total Activity Index posted 54.6 in December, little-changed from 54.7 in November and above the crucial 50.0 no-change threshold for the seventh consecutive month.

Stronger order books helped to drive the recovery across the construction sector, with survey respondents often citing work on projects that had been delayed earlier in 2020. However, stretched supply chains and delays at UK ports resulted in longer delivery times and the fastest rate of input cost inflation since April 2019.

Increased construction activity primarily reflected another sharp rise in house building during December (index at 61.9). Commercial activity also expanded (51.2), but the rate of growth eased to its lowest since the recovery began last June. Civil engineering was the weakest-performing category (48.0), with activity falling for the fourth time in the past five months.

Purchasing prices increased at the steepest pace for just under two years, reflecting supply shortages and strong demand for construction inputs. Survey respondents often cited rising prices for timber and steel.

Exactly half of the survey panel (50%) forecast a rise in business activity over the course of 2021, while only 10% anticipate a decline, which signalled the strongest optimism across the construction sector since April 2017.

However, it's important to note that the PMI survey was compiled before the current lockdown took effect and a Sunday Times report yesterday (10/1/21) highlighted that the latest monthly GDP figures to be released later this week could signal the start of a double-dip recession in the UK. 

Hannah Vickers, chief executive of the Association for Consultancy and Engineering, said: “While these figures reflect the stronger pre-lockdown performance, we’re currently in unchartered waters and the risk of a double-dip recession is very real. It is true that construction activity is, by-and-large, continuing throughout this new lockdown, but the sector will only return to consistent growth if we invest now in designing and developing the next generation of projects. Focusing on this as an immediate priority will ensure construction can retain its people and act as a catalyst for a post-Covid economic recovery.”

Tim Moore, economics director at IHS Markit, which compiles the survey, said: "Overall output growth has slowed in comparison to the catch-up phase last summer, but now it is encouraging to see the recovery driven by new projects and stronger underlying demand. Construction companies are hopeful that higher demand will broaden out beyond residential projects in the next 12 months, led by infrastructure spending and a potential rebound in new commercial work from the depressed levels seen during the pandemic.”

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: "Once again residential building was the strongest sector and construction companies focussed on this segment seem resilient for now. As the appetite for building resources grows in the first quarter of the year however, suppliers will find it difficult to ramp up production quickly to pre-pandemic levels, so we could see even longer delivery times potentially delaying some building projects as post-Brexit disruption also remains an ever-present threat."

Kate Kirby, construction & infrastructure partner at global legal business DWF, said: "The construction industry has been able to keep building through the various lockdowns towards the end of 2020, and the growth and resilience of the sector is a rare positive in a year that held so much hardship for so many. With a Brexit deal agreed and various Coronavirus vaccines now rolling out to the population, there is a real hope among the industry that while we begin 2021 in a national lockdown, it can become a year of recovery and optimism as more of the workforce get back out to work in greater numbers."

Max Jones, director in Lloyds Bank’s infrastructure and construction team, said: “Contractors know this year is likely to be difficult but on the whole there’s a sense of optimism. After all, in 2020 the sector demonstrated it could act with the agility and resilience needed to survive. Having the green light to operate on-site throughout the second lockdown allowed contractors to clear work backlogs and begin to fill 2021’s orderbooks. A collective sigh of relief will come from the industry that that remains the case for this latest lockdown too.” 

Mark Robinson, group chief executive at public sector procurement specialists SCAPE, said: “Despite the latest output levels, the construction industry continues to experience challenges. Even with sites remaining open, the impact of a third national lockdown and increased social distancing measures are likely to affect the speed at which future projects are brought forward, including decisions on private investment and important urban regeneration. The public sector continues to be the main vehicle for contractor growth and investment in communities, backed by increased government funding, as has been the case since sites reopened last summer.”

December’s PMI data was collected between 4-22 December 2020.