Press release

6 Jan 2023 London, GB

Construction joins other sectors by shrinking in December – EY ITEM Club comments

Martin Beck, Chief Economic Advisor to EY ITEM Club, provides comments on the latest public finance news.

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  • A fall in December’s construction PMI to below the 50 ‘no-change’ mark signals that the sector is now seeing the contraction in activity which has affected other sectors. Meanwhile the near-term outlook is weak. 

  • Housing market activity looks to be correcting significantly, which is likely to weigh on house building. Cost pressures facing construction businesses have continued to ease but remain elevated by past standards. And still-high inflation and falling household real incomes are likely to discourage spending on home improvements.

  • However, energy-intensive construction is benefiting disproportionately from Government action to limit rises in businesses’ energy bills and should continue to be supported by the more targeted scheme which is expected to replace the current support in April. And as a relatively cyclical sector, construction businesses could be among the first to benefit when the economy begins to recover from its current challenges. 

Martin Beck, chief economic advisor to the EY ITEM Club, says: “The S&P global/CIPS survey over the autumn and early winter had pointed to construction bucking the trend of falling activity that had affected the services and manufacturing sectors. However, that outperformance came to an end in December. The construction PMI fell to 48.8 from 50.4 in November, the first reading below the 50 ‘no-change’ mark separating the survey’s measure of expansion from contraction since last August and the weakest since May 2020. 

“A fall in construction activity wasn’t surprising. With a slowdown in the housing market and an expected outright fall in house prices, it’s likely the appetite for new home construction has deteriorated. Meanwhile high inflation and falling household real incomes are likely to discourage spending on home improvements.

“December’s survey wasn’t entirely lacking in positives. The costs facing construction businesses continue to rise, but cost price inflation eased to the lowest in two years. Meanwhile, government intervention to limit rises in businesses’ energy bills is of particular help to the relatively-energy intensive construction sector. And construction is likely to continue to be aided by the more targeted scheme which is expected to replace current support in April.

“No doubt, the sector faces a difficult period ahead. But as a relatively cyclical industry, construction could be among the first to benefit when the economy begins to recover.”