Construction rebounded in February, despite housing market headwinds – EY ITEM Club comments

• February’s construction Purchasing Managers’ Index (PMI) joined its services and manufacturing counterparts in signalling stronger activity in February. Although the economy continues to face significant headwinds, the risk of a recession is receding. 

• The near-term outlook for the construction sector remains challenging. Higher interest rates will likely weigh on residential and commercial activity, the housing market downturn and changes to planning rules risk discouraging housebuilding, and falling household real incomes are expected to discourage spending on home improvements. 

• However, the recent improvement in the mood-music surrounding the economy’s prospects, including some recovery in consumer and business confidence, should bolster the construction sector, as will falling energy costs and disinflationary pressures in general. As a relatively cyclical sector, construction firms could be among the first to benefit from the economic recovery that the EY ITEM Club expects to become embedded later this year. 

Martin Beck, chief economic advisor to the EY ITEM Club, says: “Following a rebound in the services and manufacturing PMIs in February, the construction PMI followed suit, rising to 54.6 from 48.4 in January. This was the first reading in expansionary, 50+ territory in three months and the highest since May 2022. Combined with other upbeat indicators from the retail sector, consumer confidence and tax receipts, the latest PMIs suggest the risk of recession is easing. 

“Construction activity was buoyed by signs of an improving economic outlook, a fall in supplier delays and a further easing in input price inflation, but whether the sector can continue February’s revival in activity is debatable. The downturn in the housing market is likely to persist, given relatively high mortgage rates, a weak economy and the closure of the Help to Buy scheme at the end of this month. A watering down of what had been mandatory targets set by the government for house building presents another obstacle. Higher interest rates are also impacting construction firms’ balance sheets and a poor environment for business investment will likely drag on commercial projects. 

“That said, optimism among firms in the latest S&P Global/CIPS survey was at a 12-month high. What is a comparatively energy-intensive sector will likely benefit disproportionately from the recent substantial fall in wholesale energy prices. As a relatively cyclical industry, construction could be among the first to benefit from the economic recovery the EY ITEM Club expects to become embedded as 2023 proceeds.”