Press release

6 Feb 2023 London, GB

Construction activity dipped again in January – 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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  • January’s construction PMI remained below the 50 ‘no-change’ mark for the second consecutive month. With the other sectoral PMIs also in contractionary territory, the economy looks to have contracted modestly at the start of 2023.  
  • The near-term outlook for construction won’t be helped by evidence of a significant correction in housing market activity, which will weigh on house building. Falling household real incomes are likely to discourage spending on home improvements. And commercial activity will be held back by weak business investment.
  • However, the recent significant fall in wholesale energy prices and a rebound in optimism among construction firms in the latest S&P Global/CIPS survey offer some positives. And as a relatively cyclical sector, construction firms could be among the first to benefit from the economic recovery that the EY ITEM Club expects in the second half of this year.

Martin Beck, chief economic advisor to the EY ITEM Club, says: “January’s construction PMI joined its services and manufacturing peers in pointing to a sector in contraction in January. A PMI of 48.4 was down from 48.8 in December and the second consecutive month to see a sub-50 reading. It also signalled the fastest rate of decline since May 2020.

“Weakness in construction activity was consistent with a sector facing several headwinds. The slowdown in the housing market and an outright fall in house prices over recent months means prospects for new home construction have deteriorated. High inflation and falling household real incomes are likely to discourage spending on home improvements. Higher interest rates are affecting construction firms’ balance sheets. And a weak environment for business investment is holding back commercial projects.

“That said, January’s S&P Global/CIPS survey offered some optimism. Growth in costs facing construction firms slowed to the second weakest pace since December 2020. The recent significant fall in wholesale energy prices should see cost pressures continue to ease. And the survey revealed a notable rebound in business sentiment from the 31-month low seen in December 2022, with companies citing improved sales pipelines and hopes of a turnaround in new orders.

“No doubt, the sector still faces a difficult short-term outlook. But as a relatively cyclical industry, construction could be among the first to benefit from the economic recovery the EY ITEM Club expects in the second half of this year.”