UK construction activity stabilises on back of falling inflation

UK construction activity stabilised in February, driven by improved demand on the back of falling inflation and expected interest rate cuts, according to a closely watched survey published on Wednesday.

The S&P Global/Cips UK construction purchasing managers’ index, a measure of the health of the industry, rose to 49.7 in February from 48.8 in January.

The reading was above the 49.0 forecast by analysts in a Reuters poll and the highest since August 2023. However, it remained below the threshold of 50, indicating that most businesses reported a contraction in activity.

Tim Moore, economics director at S&P Global Market Intelligence, said last month marked “the best performance for the construction sector since August 2023” but cautioned that contractors were still feeling the effects of “a protracted downturn in activity”.

Housebuilding registered the biggest improvement, with new orders for residential construction work increasing in February to 49.8, up from 44.2 in January and the highest level since November 2022. The rise suggests falling inflation and rising consumer confidence is leading to increased residential demand.

Survey respondents also indicated optimism regarding future activity, with 51 per cent anticipating a rise in business activity over the year ahead, linked to expected interest rate cuts by the Bank of England. Only 6 per cent forecast a fall in activity.

Max Jones, director of infrastructure and construction at Lloyds Bank, said: “The mood music surrounding the sector has become more upbeat in recent weeks, with healthy infrastructure pipelines a common theme coming out in our conversations with contractors.”

Wednesday’s construction PMI index joins the UK business activity index in beating economists’ expectations last month, suggesting that turnarounds in both sectors could occur soon as inflation falls.

The BoE has signalled that it is ready to cut its benchmark rate from a 16-year high of 5.25 per cent provided it sees “more evidence” of price rises slowing. In January inflation stood at 4 per cent, well below a 40-year high of 11.1 per cent in October 2022.

But headwinds remain, suggesting that the construction industry is still finding its footing as the UK economy emerges from a technical recession at the end of last year.

Commercial construction activity declined in February, with contractors citing client hesitancy and constrained budgets. Supply conditions improved, albeit at a slower pace than in the previous three months, as companies pointed to the negative impact on deliveries from Red Sea shipping disruption.

Demand for construction inputs — or the goods contractors buy, such as plasterboard and steel — was also subdued, as last month marked the sixth consecutive reduction in month-on-month purchasing activity. 

Matthew Pointon, senior property economist at the research company Capital Economics, said commercial construction had “been contracting since September last year as developers wait for the outlook to stabilise”.

Still, some analysts think the improvement in construction in February could mark the start of a turn for the sector, particularly as easing mortgage rates improve residential demand and as house prices recover.

“Forward looking survey indicators provide encouragement that business conditions could improve in the coming months,” said Moore.