New Year cheer as confidence ticks up

Confidence among UK construction firms improved in January with the latest monthly S&P Global/CIPS UK Purchasing Managers’ Index (PMI) showing that business optimism has reached its highest level for two years.

The headline construction PMI rating ticked up to 48.8 in January compared to 46.8 in December 2023, with survey compiler S&P Global stating that companies envisage “more favourable underlying economic prospects”. However, the overall rating is still below the neutral 50.0 mark, which indicates the industry is still declining, albeit at a slower pace.

Civil engineering was the best-performing segment with a PMI score of 49.8, ahead of commercial construction (49.1). The housebuilding PMI rose from 41.4 in December to 44.2 in January, although S&P Global noted there were “subdued demand conditions and a lack of work to replace completed projects”.

Overall data for January indicated a reduction in new work for the sixth consecutive month, but S&P stated that “the pace of decline was only marginal and the weakest seen over this period”.

Despite subdued order books, the latest data signals an upturn in business confidence, with expected lower borrowing costs and higher consumer confidence likely to boost construction activity this year.

As a result, the January 2024 index provided “the highest level of business optimism since January 2022”, S&P Global said.

RSM UK national head of construction Kelly Boorman said there were “reasons for cautious optimism”, although overall sector activity remained subdued. “Further upticks in housing activity are likely in the coming months, especially now that interest rates have reached their peak. Commercial market activity may also see an uplift this year, as more and more businesses focus on returning to the office, making a case for increased demand.”

She added that the government decision last week to invest £775bn in infrastructure projects over the next 10 years “will enable construction businesses to consider long-term planning and investment for the first time in several years”.

Aecom head of cost management and commercial Brian Smith warned that even if confidence continued to grow, high inflation and tight credit conditions will affect construction’s recovery as firms contemplate reducing the size of their workforce.

“Construction output has continued to struggle throughout the winter, with five months of contraction. Some of the recent fall in activity can be partially attributed to wet weather, but the greater concern is the high inflation and tight credit conditions that continue to hamper housebuilding and are beginning to be felt in commercial development,” he noted.

“These latest figures will hopefully provide greater ambition when it comes to the sector’s long-term approach to resourcing, which represents a growing risk. Reducing workforce capacity in response to broader economic headwinds will ultimately impact future planning and projects at a time when competition for contracts is increasing.”

Boorman reflected this concern, saying: “The industry could be facing a real skills and productivity issue”, amid a 6 per cent drop in apprenticeship starts and 500,000 UK construction workers set to retire in the next 10 years.

Max Jones, a director in Lloyds Bank’s infrastructure and construction team, noted that his clients are seeing their margins on fixed-price contracts eroded by broader issues affecting the sector, but they are also eyeing certain specialisms as areas for growth. “Those with niche specialisms, particularly in the infrastructure space, could be among the best-performing in the coming months.

“It’s an area that we are increasingly seeing businesses investing more in, including in water infrastructure, data centres and solar and wind power facilities. Together with investment in skills and diversification, it has all the elements of a more prosperous year ahead.”