Cautious welcome for new PMI figures that show confidence at a near two-year high

Leading industry figures have given a cautious welcome to the latest PMI figures that show a boost from receding political uncertainty has led to business optimism rising to its highest for almost two years, but have warned against complacency in the year ahead.

The bellweather IHS Markit/CIPS January data pointed to a much slower decline in UK construction output than that seen at the end of 2019. New business volumes were also close to stabilisation, which contrasted with the sharp falls seen in the final quarter of last year. 

Looking ahead, construction companies are now the most optimistic about their growth prospects since April 2018. A number of firms noted that clients' willingness to spend had picked up after the general election, which should translate into rising workloads over the course of 2020.

The headline seasonally adjusted IHS Markit/CIPS UK Construction Total Activity Index rebounded from 44.4 in December to 48.4 in January. The latest reading was still below the 50.0 no-change threshold, but signalled the slowest fall in overall construction output for eight months.

House building was the best performing broad area of construction activity, with output falling only slightly in January. 

Commercial activity decreased for the thirteenth consecutive month in January, but the rate of contraction was much weaker than in December and the softest since the start of 2019. 

Meanwhile, civil engineering was the worst performing category of output in January, with construction firms often citing a lack of tender opportunities to help replace completed infrastructure contracts.

Tim Moore, economics associate director at IHS Markit, which compiles the survey, said: "Despite concerns about prospects for work on infrastructure projects, latest data revealed a strong rebound in business optimism across the construction sector as a whole in January. The degree of positivity reached its highest level since April 2018, driven by hopes that improving confidence among clients will continue to translate into new contract awards over the course of 2020."

Duncan Brock, group director at the Chartered Institute of Procurement and Supply, said: "Though the overall Index still registered below the no-change neutral mark, the signs are good that the sector is building up momentum for the year ahead and recovering some losses in new work which will ease concerns that the last bout of uncertainty has inflicted irreparable damage on the sector. 

"Job losses are still in evidence overall and with an increase in sub-contractor use, it appears the sector is looking for short-term fixes to manage current workloads. Construction firms are not yet ready to scale up plans to increase workforces in the coming months without a stronger economic and political recovery clearly in sight.

"So, though this rebound is a welcome sign, as with all sudden improvements, the danger remains the sector could easily recoil and shrink again. The domestic political situation and the UK’s attempt to find its place in the world remains littered with obstacles so businesses could find themselves on this see-saw of good and bad news for some time yet."

Hannah Vickers, chief executive of the Association for Consultancy and Engineering (ACE), said: “The key takeaway from these figures are that as political instability in Westminster has faded, business confidence has returned. While concerns remain, the figures do point towards a return to optimism and over the next 12 months, a return to positive growth. However, this growth remains fragile and we look forward to government supporting the sector with substantial announcements at the upcoming budget.”

Max Jones, relationship director in Lloyds Bank Commercial Banking’s infrastructure and construction team, said: “An increase in the first reading of the year will be good for confidence. If a raft of major infrastructure projects get the green light this will boost order books in the long run and persuade others to invest, although recent rumblings around the fate of the biggest project of all – HS2 – will still be of concern in boardrooms.”

Mark Robinson, Scape Group chief executive, said: “With clarity around Brexit, clients are happy to spend again which has translated to an increase in contract awards across the country and, as a result, positivity around growth prospects has reached its highest level in 21-months. But the new rules proposed by the migration advisory committee last week mean that only migrants with a job and salary of more than £25,600 can settle in the UK, which is bad news for lower-paid skilled workers. Around 15% of the construction workforce is made up of foreign nationals and the industry simply does not have the time to prepare the shortfall they will face if these proposals come into effect. With the industry finally finding momentum again, I urge the government to not stop it in its tracks, and to do everything it can to allow construction to thrive.”

Kate Kirby, construction and infrastructure partner at global legal business, DWF, said: “Though this rebound is a welcome sign, the danger remains the sector could shrink again. The political situation in the UK and its attempt to navigate through trade deals this year could see construction businesses experiencing a see-saw of good and bad news in the coming months."

Jan Crosby, UK head of infrastructure, building and construction at KPMG, said: “The marginal shift in this month’s reading is symptomatic of a sector finally recovering from a turbulent political period. We’re starting to see interest from international investors in the UK again as they anticipate more infrastructure spend. Firms are starting to take a more strategic interest and are eager to gain a foothold in large UK infrastructure projects.”