UK construction revival runs out of steam but firms remain optimistic

UK construction sector growth slowed more than expected in January, a survey of the industry showed on Thursday, but confidence for the year ahead picked up to its strongest in over a year.

The Markit Construction Purchasing Managers' Index (PMI) for January fell to 52.2 from 54.2 the previous month, worse than the 53.8 consensus estimate and the slowest rate of growth since last summer.

All three sub-sectors of housing, commercial and civil engineering saw output soften, but remain above July's lows, with housebuilding enduring its weakest expansion for five months, with its activity index sinking to 52.6 from 54.9 in December.

All three The commercial index sank to just 50.3 from 51.6, while the civil engineering activity index dropped to 51.0, from 54.4

A lack of new orders was the main reason for the slowdown, with some construction firms saying they had seen subdued willingness to spend among clients in January.

The UK PMI was echoed by the European economic sentiment survey, which showed that the balance of construction companies reporting rising activity fell to -12 in January from -2 in December.

"The mini-revival in construction activity, prompted by relief among firms about the short-term fallout from the Brexit vote and the boost to housing demand from the MPC’s interest rate cut in August, already has run out of steam," said economist Sam Tombs at Pantheon Macroeconomics.

But he said that while confidence among construction firms about the outlook picked up and employment rose at the fastest rate since May, he doubted whether demand will meet builders’ expectations.

"Businesses will remain reluctant to invest while the government continues to tout the possibility of a “cliff-edge” Brexit which would lead to a sudden impairment of UK firms access to the single market. In addition, demand for new homes likely will deteriorate this year as high inflation squeezes households’ real incomes and as lenders reflect the recent pickup in funding costs in mortgage rates."

Howard Archer at IHS Global Insight said it was a largely disappointing report and fanned concern over the outlook for stuttering construction sector, while the spike in optimism and employment requiring activity and orders to pick up if they are to be sustained.

"A major concern for construction companies are surging input prices which rose at the fastest rate in January since August 2008. This follows on from the manufacturing survey showing input prices rising at the fastest rate in the surveys’ 25-year history."

He added that optimism belies the clear possibility that the economy will slow appreciably over the coming months despite its current resilience, while the lacklustre housing market is another concern for the construction sector.

"Additionally, construction companies’ input costs are being pushed markedly higher by a sharply weakened pound. A substantial amount of building components and materials are imported.

The industry optimism may partly stem from government measures aimed at boosting infrastructure and housebuilding, many of which were included or repeated in the Chancellor's Autumn Statement, with measures including £2.3bn earmarked for a new Housing Infrastructure Fund to support the building of up to 100,000 new homes, £1.4bn to provide 40,000 new affordable homes, £1.7bn to speed up the construction of new homes on public sector land and £1.3bn devoted to improving and upgrading roads.