Press release

4 Feb 2020 London, GB

January UK construction activity contracted at slowest rate since last May

While still far from a strong survey, there are several positives to take from it.

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  • While still far from a strong survey, there are several positives to take from it.
  • The January purchasing managers’ survey does offer genuine hope that the construction sector can benefit in the near term at least from increased client willingness to commit to new projects amid reduced uncertainties following December’s decisive General Election result. Significantly the survey reported that “survey respondents widely commented on a boost to client demand from receding political uncertainty.” Greater clarity on Brexit was also reported to have had a positive impact on the residential development sector.
  • Construction companies will also be hoping that recent signs of a pick-up in the housing market are sustained.
  • Admittedly, the survey points to construction activity still contracting, but the rate of contraction slowed markedly to the smallest since May 2019 as the PMI rose to 48.4 from 44.4 in December. Slower contraction across all sectors in January with housing activity nearing stabilisation.
  • Near stabilisation in new orders and confidence rising to the highest level since April 2018 fuel hopes of near-term growth in activity.
  • Construction companies will obviously be hoping that client willingness to commit to major commercial and residential projects rises further over the coming months amid reduced uncertainties.
  • Construction companies will also be hoping that the Government’s planned sharp stepping up of investment in infrastructure feeds through as quickly as possible to boost activity. This will be seen as particularly important by the civil engineering sector where activity is reportedly being held back by a lack of new tender opportunities to replace completed infrastructure contracts.
  • Construction companies will also likely be looking to the Budget for 2020/21 (to be held on 11 March) to contain significant measures aimed at boosting the housing market.
  • With the manufacturing and “flash” services surveys also showing activity expanding at the fastest rate for 16 months in January, the improved construction PMI adds to the impression that the reduced uncertainties have given the economy a lift at the start of the first quarter.
  • It does need to be taken into consideration that the purchasing managers’ surveys can tend to overstate developments at times of significant changing political circumstances, so the surveys could possibly exaggerate the pick-up in economic activity in January after overplaying some of the earlier weakness.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

“The purchasing managers’ survey points to the construction sector contracting at a slower rate in January. Nevertheless, January marked the ninth month of construction contraction.

“Specifically, the construction PMI climbed to an eight-month high of 48.4 in January after dipping to 44.4 in December from a then four-month high of 45.2 in November. It had been as low as 43.3 in September – which had only been fractionally above the more than 10-year low of 43.1 suffered In June.

“January’s reading of 48.4 was much closer to, but still below the 50.0 level which indicates flat activity and is sharply down on the index’s lifetime (1997-2019) average of 54.1.

“All sectors saw slower contraction in January.

“The best performing was house building where contraction was modest and the weakest since last May. There are currently signs that the housing market has at least temporarily picked up which will be welcomed by construction companies.

“Commercial activity declined at the slowest rate for a year, although it was a 13th successive decline. It was observed that reduced domestic political uncertainty had the potential to unlock new projects and boost client spending.

“Civil engineering remained the weakest performing sector with still substantial contraction – but at least the rate of decline was the slowest since August. There was concern about a lack of new tender opportunities to replace completed infrastructure contracts.

“New orders contracted only slightly in January and at the slowest rate since last March. There was a particularly sharp slowdown in the decline in orders compared to December.

“Confidence among construction companies rose to the highest level since April 2018 as a number observed that clients' willingness to spend had picked up after the General Election, which should translate into rising workloads over the course of 2020.

“Employment in the sector fell at the slowest rate for five months and only slightly.

“Input prices rose at a sharper rate in January.

Construction output reversed sharp October drop in November

“Latest ONS data show that construction output grew 1.9% month-on-month in November, but this only offset the 2.0% month-on-month contraction seen in October; construction output was up 2.0% year-on-year.

“This followed construction output growing 1.2% quarter-on-quarter in the third quarter after contracting 1.0% quarter-on-quarter in the second quarter.

“New construction orders were reported to have edged up just 0.3% quarter-on-quarter in the third quarter after plunging 14.5% in the second quarter; they were down 6.8% year-on-year.”