Sustained slump in activity since September

The latest PMI® data has been released looking at construction activity over the last month.

December data indicated another solid fall in UK construction activity, although the rate of decline eased to the slowest since the current phase of decline began last September.

The major factor in the slump revealed by the data was a sustained slump in house building, which survey respondents linked to elevated interest rates and subdued confidence among clients.

A bright spot within the data was the improving supply conditions, which continued in December, with delivery times for construction items shortening for the tenth month in a row. While price discounting among suppliers contributed to a moderate fall in average cost burdens across the construction sector at the end of 2023.

At 46.8 in December, the headline S&P Global UK Construction Purchasing Managers’ Index™ (PMI®) – a seasonally adjusted index tracking changes in total industry activity – was below the neutral 50.0 mark for the fourth month running. However, the index was up from 45.5 in November and the highest for four months.

Alongside house building, civil engineering was also lagging at the end of last year.

Total new work decreased at the slowest pace since the current period of decline began in August 2023. Subdued customer demand across the house building sector was often cited as a factor leading to reduced order books.

Tim Moore, Economics Director at S&P Global Market Intelligence, which compiles the survey said: “Construction companies experienced another fall in business activity at the end of 2023 as weak order books meant a lack of new work to replace completed projects. House building was the worst-performing area of construction activity, but even in this segment there were signs that the downturn has started to ease.

“Elevated borrowing costs and a subsequent slump in market confidence were the main factors leading to falling sales volumes across the construction sector in the second half of 2023. Survey respondents also continued to cite worries about the broader UK economic outlook, especially in relation to prospects for commercial construction.

“However, expectations of falling interest rates during the months ahead appear to have supported confidence levels among construction companies. December data indicated that 41% of construction firms predict a rise in business activity over the course of 2024, while only 17% forecast a decline. This contrasted with negative sentiment overall at the same time a year earlier.”

Brendan Sharkey, Construction and Real Estate Specialist at MHA, commented on the data: “December’s PMI data shows another decline, continuing the theme from last year. There weren’t many construction businesses that escaped unscathed in 2023. However, while the construction industry is likely to have a slow start as we go into Q1 2024 and there may be some casualties, we will begin to see green shoots of recovery as the year progresses.

“This year will be one of the strongest years for affordable housing development. Many of the big players have moved into this segment because there is steadier cash flows and margins compared to other projects.  Refurbishments are also likely to pick up this year, whether that is updating offices or repurposing.  BTR will continue its upward trend.

“Overall, if the construction industry can get through Q1 with relatively few casualties, then the rest of the year should be far more positive than 2023.”

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