Construction activity falls at fastest rate since May 2020

The UK’s construction sector recorded a fall in activity in December 2022, with the rate of decline the fastest since May 2020. New orders fell at the fastest rate for over two-and-a-half years and optimism for the year ahead dipped into negative territory for only the sixth time on record. That’s all according to the latest seasonally adjusted S&P Global / CIPS UK Construction Purchasing Managers’ Index®.

At 48.8 in December, down from 50.4 in November, the headline Index – which measures month-on-month changes in total industry activity – registered below the 50.0 mark to signal the first contraction in construction sector output since last August. Although commercial construction activity continued to rise in the final month of the year, the rate of contraction eased to the slowest in the current four-month sequence and was only fractional overall (index at 50.3). As such, the uplift in the commercial sector was outweighed by contractions across the residential and civil engineering sectors in December. Housing activity declined for the first time since last July and only marginally (48.0), while civil engineering recorded a sixth consecutive monthly contraction in output (46.8) and the rate of decline remained sharp overall. According to survey respondents, the fall was driven by weak client demand, linked in turn to higher prices.

Challenging business conditions were reflected in confidence amongst constructors towards the year-ahead outlook for activity, which dropped into negative territory for the first time since the initial COVID-19 wave and for only the sixth time on record. Downbeat sentiment was attributed to expectations of a recession and poor demand conditions, as well as inflationary pressures. December data pointed to the first fall in employment since January 2021. Weak sales meant vacancies were often not being filled, according to panelists. Costs faced by construction companies continued to increase during the final month of the year, linked by panelists to energy, material, fuel and import costs. Although still marked, the rate of inflation was the weakest for two years. Rates charged by subcontractors also rose in December, but at a slightly reduced pace.

Dr John Glen, Chief Economist at the Chartered Institute of Procurement & Supply, said: “The construction sector was stuck in the mud in December with the steepest fall in activity since the beginning of the pandemic in May 2020 and a similarly fast drop in pipelines of new work.

“House building saw a notable change of direction, with a mix of higher inflation for raw materials and transportation and the squeeze on affordability rates for mortgages resulting in fewer house sales. The sector subsequently fell back into contraction for the first time since July. Civil engineering, responsible for larger projects, continued to be the weakest performer again, with a sixth month in the doldrums as uncertainty about the UK economy reared its ugly head again and customers hesitated. Supply chain managers reined back spending on materials with the sharpest fall in buying activity for over two-and-a-half years as a result of this poor demand.

“Optimism remained very flat and at one of the starkest rates in the survey’s history. Builders were reining back on recruitment unconvinced there will be enough growth in the UK economy in 2023 to justify additional expenditure when margins remained so squeezed. Builders are fast running out of the resilient spirit maintained over the last couple of years as the blocks to success piled up and the winter of discontent with high inflation, strikes and shortages continues.”