Construction Output Falls for First Time since February 2024

A MODEST FALL in total construction output was recorded in January 2025, ending a 10-month period of sustained expansion.

Shrinking order books and rising cost pressures contributed to the weakest construction business activity expectations since October 2023.

At 48.1 in January, down sharply from 53.3 in December, the headline seasonally adjusted S&P Global UK Construction Purchasing Managers’ Index™ (PMI) registered below the 50.0 (no change) threshold for the first time since February 2024.

Construction companies cited delayed decision-making by clients on major projects and general economic uncertainty weighing on business activity at the start of 2025. A number of firms also commented on the impact of subdued market conditions in the residential building sector.

Fall in Construction Output

Latest data shows that house building (index at 44.9) decreased for the fourth successive month and at the fastest pace since January 2024.

Civil engineering activity (44.6) declined at a relatively sharp rate, although this partly reflected disruptions from unusually wet weather at the start of the year.

Output in the commercial construction category also returned to contraction in January (48.9). This was linked to a lack of tender opportunities and a reluctance among clients to commit to new projects.

January data pointed to a decline in incoming new work for the first time in 12 months. Although only modest, the rate of contraction was the steepest since November 2023. Anecdotal evidence suggested that a lack of confidence among clients and worries about the UK economic outlook had contributed to fewer sales enquires.

Purchasing activity decreased for the second month in a row, reflecting weak order books and a lack of new work to replace completed projects.

Despite softer demand for construction products and materials, the latest survey indicated the steepest rise in input costs since April 2023. Construction companies noted that suppliers had sought to pass on rising energy, transportation and staff costs.

Moreover, vendor performance deteriorated to the greatest extent for two years, which was partly linked to shipping delays.

Subcontractor charges increased at an accelerated pace in January, with the rate of inflation hitting a 21-month high. This was despite a reduction in subcontractor use for the fifth time in the past six months.

Construction firms meanwhile signalled renewed cutbacks to their staffing levels. Employment decreased for the first time since August 2024, but the rate of decline was only marginal.

Finally, around 38% of the survey panel predict a rise in business activity over the year ahead, while only 17% forecast a reduction. However, this pointed to the lowest degree of business optimism since October 2023. Survey respondents cited a post-Budget dip in confidence among clients, alongside weakening sales pipelines and the impact of lacklustre domestic economic conditions.

COMMENT

Tim Moore, S&P Global Economics Director

Tim Moore, Economics Director at S&P Global Market Intelligence, said: “UK construction output fell for the first time in nearly a year as gloomy economic prospects, elevated borrowing costs and weak client confidence resulted in subdued workloads. “Output levels decreased across the board in January, with particularly sharp reductions seen in the residential and civil engineering categories.

“Construction firms noted the fastest fall in residential work for 12 months as market conditions remained somewhat subdued. Anecdotal evidence suggested that caution regarding demand for new projects was prevalent at the start of 2025, despite strong policy support for house building and hopes for a longer-term boost to supply via planning reform.

“The forward-looking survey indicators were also relatively downbeat in January. New orders decreased at the fastest pace since November 2023 amid many reports of delayed decision-making by clients. Reduced workloads, combined with concerns about the general UK economic outlook, led to a dip in business activity expectations to the lowest for 15 months.

“There was little respite on the supply front, as transport delays meant that vendor lead times lengthened to the greatest extent for two years. Demand for construction items softened again in January, but purchase price inflation was the highest since April 2023 as suppliers sought to pass on rising energy, fuel and wage costs.”

INDUSTRY COMMENT

Short Term Gloom 

Atul Kariya, Head of Construction at MHA

Atul Kariya, Head of Real Estate and Construction at MHA, said: “It is hardly surprising that construction PMI activity has fallen as the industry and the economy as a whole are now starting to see the full impact of the proposed tax rises and increased labour costs in the Autumn Budget. These are starting to feed through into overall business sentiment in the sector as well as ongoing challenging economic conditions in the UK and overseas. The glimmers of optimism that the industry witnessed in September last year when the PMI soared to 57.2 now seem a little distant, despite order book and enquiry levels remaining relatively buoyant.

“Even though there has been a recent increase in house sales this is most likely to have been driven by the impending increase in Stamp Duty in April which is reflected in share values across the sector as housebuilders are currently trading even lower than they did during the pandemic.

“The housebuilding sector has witnessed a sharp decline despite the government’s planning reforms on housing that are due to be kickstarted in the spring, while commercial construction also saw a decline in output as nervousness remains around the UK’s economic growth.

“While the short term outlook remains gloomy we are hopeful that with successive cuts in interest rates throughout 2025, anticipated to start today, there will be a pickup in activity and optimism in the sector.”

Interest Rate Hope

Josh Ward-Jones, Director of Bloom Building Consultancy

Josh Ward-Jones, Director of Bloom Building Consultancy, commented: “The warning lights on the construction industry dashboard have switched from amber to red.

“In fact, there’s precious little to cheer about in January’s PMI data, which shows a clean sweep of negative trends. Both output and orders are down, cost pressures are rising and sentiment is sliding.

“For much of 2024, the weakness of the housebuilding sector was offset by the buoyancy of commercial construction. No longer. January’s headline figure slipped into contraction territory for the first time since last February.

“The pipeline of new work is starting to get patchy too. While the decline in new orders was modest, as the first reversal in 12 months it cannot be dismissed as inconsequential.

“Many are blaming the slowdown in demand on the hit to business confidence seen in the wake of last October’s Budget. Companies worried about their business prospects and the impact of April’s jump in Employer NI Contributions have been quick to pause or rein in capital spending.

“This slowdown is being reflected in construction firms’ sentiment too. The PMI survey found that just 38% of contractors expect business activity to increase over the next year – the lowest level since October 2023. As recently as a month ago, the figure stood at almost half.

“Yet while there has been a cooling in new construction work, demand for refurbishment and upgrade work remains brisker. And though cost pressures are eating into contractors’ margins, the Bank of England could offer some relief if it cuts interest rates as expected.

“Cheaper finance costs would be a welcome salve for an industry which has made a fragile and cautious start to 2025.”

Skills Shortage Concerns

Terry Woodley, MD of Development Finance at Shawbrook

Terry Woodley, MD of Development Finance at Shawbrook, said: “The adverse weather put a definite dampener on activity this month, with construction output dipping, as well as the continued declines in areas such as civil engineering.

“Not all has been lost, however, as developers have responded positively to the Chancellor’s recent speech on growth in which she outlined the next steps in streamlining planning decisions to ensure the 1.5 million new homes target is met.

“Though a welcome update, there are still concerns around the current skills shortage in the sector, which could stand in the way of Labour’s vision of ‘shovels in the ground and cranes in the sky’. Construction activity has the potential to take off this year, but until these issues are addressed, the sector risks being held back.”

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