Key Takeaways
- The UK construction sector contracted for the 12th consecutive month in December, the longest such run in almost two decades.
- The S&P Global/CIPS Purchasing Managers’ Index (PMI) for the sector came in at 40.1 in December, below the median forecast of 42.5.
- Despite the downturn, firms showed signs of optimism about 2026, with business activity expectations for the coming 12 months hitting their highest since July.
- The commercial sector output dropped at the sharpest pace in more than 5-1/2 years, while the residential building activity subindex dropped to its weakest reading since May 2020.
- The all-sector PMI, which includes services, manufacturing, and construction data, edged up to 50.4 from 50.1 in November.
Introduction to the UK Construction Sector Downturn
The UK construction sector has been experiencing a prolonged downturn, with output contracting for the 12th consecutive month in December. This is the longest such run in almost two decades, with the sector’s downturn extending to its longest unbroken run of contractions since the global financial crisis of 2007-09. The S&P Global/CIPS Purchasing Managers’ Index (PMI) for the sector came in at 40.1 in December, which is not much higher than its 5-1/2-year low of 39.4 in November. This reading was below the median forecast of 42.5 in a Reuters poll of economists and the 50 level that separates growth from contraction.
Challenging Business Conditions and Falling Workloads
UK construction companies reported challenging business conditions and falling workloads in December, with many firms citing subdued demand and fragile client confidence. Despite a lifting of budget-related uncertainty, delayed spending decisions were still cited as contributing to weak sales pipelines at the close of the year. The drop in output was attributed to a combination of factors, including reduced demand, delayed spending decisions, and fragile client confidence. The commercial sector output dropped at the sharpest pace in more than 5-1/2 years, while the downturn in civil engineering eased but remained the weakest performing category in December.
Residential Building Activity and Government Initiatives
The residential building activity subindex dropped to 33.5, the weakest reading since May 2020 when lockdowns during the coronavirus pandemic halted construction work. This is a concern for the UK government, which is trying to boost the pace of house-building. The government has introduced various initiatives to stimulate the construction sector, including investments in infrastructure and housing. However, the sector’s performance remains subdued, with total new orders and employment in December falling, although to a lesser extent than in November.
Signs of Optimism and Confidence
Despite the downturn, firms showed signs of confidence about the outlook, with business activity expectations for the coming 12 months hitting their highest since July. This optimism is driven by the prospect of lower borrowing costs, the lifting of uncertainty about the finance minister’s budget, and rising infrastructure spending. Weaker inflationary pressure also raised hopes of a turnaround in the sector. The all-sector PMI, which includes previously published services and manufacturing reports for December, as well as the construction data, edged up to 50.4 from 50.1 in November, indicating a possible turnaround in the sector.
Conclusion and Future Outlook
The UK construction sector’s prolonged downturn is a concern for the economy, but there are signs of optimism about the future. The sector’s performance is expected to improve in the coming months, driven by rising infrastructure spending, lower borrowing costs, and the lifting of uncertainty about the government’s budget. However, the sector still faces challenges, including subdued demand and fragile client confidence. The government’s initiatives to stimulate the sector, including investments in infrastructure and housing, are expected to support the sector’s recovery. As the sector looks to the future, it is likely that the outlook will remain uncertain, but the signs of optimism and confidence among firms are a positive indicator of a potential turnaround in the sector.