Construction Output Growth Eases to a Six Month Low

OUTPUT FROM UK construction companies eased to a six month low as total business activity in December 2024 expanded at the slowest pace since last June.

The headline S&P Global UK Construction Purchasing Managers’ Index™ (PMI) – a seasonally adjusted index tracking changes in total industry activity – registered 53.3 in December, down from 55.2 in November and the lowest for six months.

That said, the index has stayed above the crucial 50.0 no-change value since March 2024 and the latest reading still signalled a solid upturn in overall construction output.

Commercial activity was the fastest-growing area of the construction sector in December (index at 55.0), followed by civil engineering (52.9). However, both categories saw a slowdown in the rate of business activity expansion since November.

Residential work was again the only category to register an overall decline in output during December (47.6). House building activity has now decreased for three consecutive months and the latest reduction was the fastest since June 2024. Survey respondents noted that subdued demand conditions, elevated borrowing costs and weak consumer confidence had all weighed on activity.

Growth Eases

Mirroring the trend for output volumes, total new work also expanded at the slowest rate since last June. Anecdotal evidence suggested that improving tender opportunities in the commercial building sector had been offset by cutbacks to residential development projects and a lack of new business to replace completed infrastructure work. New order growth moderated for the third month running.

Construction companies responded to weaker new order growth by reducing their input buying for the first time in eight months. In some instances, lower levels of purchasing activity were linked to tighter inventory management.

Suppliers’ delivery times were broadly unchanged in December. While some firms noted improving vendor performance due to lower demand, there were also reports that shipping delays had led to longer lead times for imported items.

December data highlighted a decline in sub-contractor usage for the fourth time in the past five months. Despite lower demand for their services, sub-contractor availability improved only marginally and at the slowest pace since March 2023. Meanwhile, latest data indicated the fastest rise in rates charged by sub-contractors for 20 months.

Adding to upward pressure on input costs, purchase prices increased at a robust pace that was only slightly softer than November’s one-and-a-half-year high.

Elevated cost inflation and rising salary payments were again cited as factors holding back staff hiring. The pace of job creation remained lower than the pre-pandemic average.

Looking Ahead

Looking ahead, around 48% of the survey panel predict a rise in output over the course of 2025, while only 15% forecast a decline. The degree of positive sentiment picked up sharply since November, but it was still much weaker than seen in the first half of 2024. While construction firms typically commented on optimism linked to long-term business expansion plans, many also cited worries about the general UK economic outlook and tighter budgets for capital spending.

COMMENT

Tim Moore, S&P Global Economics Director

Tim Moore, Economics Director at S&P Global Market Intelligence, said: “December data highlighted a loss of momentum for construction output growth, with all three main categories of activity posting weaker performances than in the previous month. Commercial building maintained its position as the fastest-growing area of construction activity, followed by civil engineering. In contrast, residential work decreased for the third month running and at the fastest pace since June 2024.

“The slowdown in overall construction output growth reflected more subdued demand conditions in recent months, as illustrated by a further moderation in new order growth during December. Survey respondents commented on headwinds from elevated borrowing costs and the impact of fragile consumer confidence.

“Staff hiring picked up since November, but there were signs of tight supply conditions. Sub-contractor availability improved to the smallest extent since March 2023, while the rates they charged increased at the fastest pace for just over one-and-a-half years.

“Concerns about the demand outlook weighed on construction sector growth expectations for 2025. Although confidence recovered after a post-Budget slump during November, it was still much weaker than in the first half of 2024. Many firms reported worries about cutbacks to capital spending and gloomy projections for the UK economy.”

INDUSTRY COMMENT

Warning Lights

Josh Ward-Jones, Director of Bloom Building Consultancy

Josh Ward-Jones, Director of Bloom Building Consultancy, commented: “This is not the housebuilding boom the Government wants.

“Levels of housebuilding have now fallen for three months in a row and the contraction is getting worse, not better. December’s PMI survey found that housebuilders are being held back by the high cost of borrowing, weak consumer confidence and patchy demand from buyers.

“With the fundamentals of housebuilding seemingly stacked against them, many residential developers are holding fire and no amount of relaxation in the planning rules will get the new homes Britain needs built.

“Yet there are some bright spots. Demand for commercial buildings remains strong, and some contractors report that this is offsetting the slump in residential demand and keeping their order books relatively full. Just under half of the construction firms surveyed remain upbeat about the prospects for 2025, even if sentiment has weakened noticeably since the first half of 2024.

“But behind the positive headline figures for the industry as whole, warning lights are coming on about the weakness of residential construction. Many housebuilders are proceeding with caution or not at all, and the Government’s promise to get 1.5 million more homes built in England over the next five years is going to be very hard to keep.”

Slow Burn

Brendan Sharkey, MHA Real Estate & Construction Specialist

Brendan Sharkey, Real Estate and Construction Specialist at MHA, said: “The fall in construction PMI is hardly surprising as the industry continues to benefit from the government’s investment in infrastructure but at the same time is hampered by still historically high interest rates and an uptick in employment costs.

“Activity in the commercial sector remains strong, but housing has dipped. Whether the housing market will see a reversal in fortunes this year remains to be seen, however the opportunity to develop is clearly there given the planning reforms included in the recent NPPF.

“From what our clients are telling us, 2025 is expected to be better than last year; however, it’ll be a slow burn.  Infrastructure will do well given the government’s investment plans as will commercial as the UK is becoming an investment choice for many. Housing supply will be available but it’s whether demand will follow if interest rates remain stubbornly high.

“While high interest rates and increasing labour costs will continue to have an impact on the industry, an increased flow of inward investment should provide some relief.

“We expect that construction PMI will hover around the same level as it is currently for much of 2025, and any spikes are likely to be short-lived. Although growth will be slow and steady the fundamentals for the sector are solid and there is an air of quiet optimism.”

Quietly Optimistic

Terry Woodley, MD of Development Finance at Shawbrook

Terry Woodley, MD of Development Finance at Shawbrook, commented: “Despite commercial work continuing to be a driver of construction activity in December, this hasn’t been enough to offset the dip in housebuilding activity, which remained subdued in the face of high borrowing costs and low confidence levels. As such, housebuilders have kept their cards close to their chest and curbed spending on new land until the market improves.

“Despite this, developers are quietly optimistic that 2025 will see the sector turn a corner. Mortgage rates are expected to reduce and the Government’s pro-housebuilding agenda should help to kickstart activity this year.”

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