UK construction sector remains in contraction; business optimism at two-year high

(Sharecast News) - The UK construction sector remained in contraction territory in January, but business optimism hit a two-year high amid expectations of rate cuts, according to a survey released on Tuesday. The S&P Global/CIPS construction purchasing managers' index rose to 48.8 from 46.8 in December. This marked the highest reading since August 2023 and was above consensus expectations of 47.3.

Nevertheless, the index remained below the 50.0 mark that separates contraction from expansion for the fifth month in a row.

Civil engineering was the best-performing segment in January, with output levels close to stabilisation. Commercial activity also showed some resilience, with the respective index pointing to only a marginal rate of decline. However, house building continued to fall sharply at the start of 2024.

Survey respondents pointed to subdued demand conditions and a lack of work to replace completed projects.

Despite subdued order books, the survey found there was a sharp upturn in business activity expectations. Around 51% of the panel forecast a rise in business activity in the year ahead, with only 12% expecting a decline. This marked the highest level of business optimism since January 2022, with lower borrowing costs and higher consumer confidence expected to boost construction activity over the course of the year.

Tim Moore, economics director at S&P Global Market Intelligence, said: "UK construction companies seem increasingly optimistic that the worst could be behind them soon as recession risks fade and interest rate cuts appear close on the horizon. The prospect of looser financial conditions and an improving economic backdrop meant that business activity expectations strengthened to the highest for two years in January. Moreover, there were again signs that customer demand is close to turning a corner as total new orders fell to the smallest extent for six months.

"Relatively subdued pipelines of new work nonetheless resulted in lower levels of construction output for a fifth successive month in January. House building remained by far the weakest-performing category, despite the rate of decline easing to its slowest since March 2023. "Meanwhile, higher prices paid for imported items contributed to a rise in overall cost burdens for the first time since last September. However, there were still signs of space capacity across the construction supply chain as vendor delivery times shortened again at the start of 2024 and sub-contractor availability increased at a robust pace."