Sector activity decline slows as business confidence improves

A year-long slump in construction activity has begun to slow as business confidence began to show small signs of recovery, latest figures show.

The S&P Global purchasers’ managers index (PMI) registered 40.1 in for December, up from 39.4 in November, but still short of the 44.1 figure from October.

A number below 50 shows industry activity is shrinking.

The PMI figure for November reflected the lowest activity seen since May 2020, when almost all housebuilding stopped and many other sites were shut due to the Covid pandemic.

However, in in its latest data S&P Global noted a “recovery in business optimism” to its highest level in five months, with more than a third of businesses predicting a rise in output in 2026, compared with a fifth who forecasted a decline.

But S&P Global also said construction companies “experienced another sharp downturn in business activity and incoming new work” in December, with particularly sharp falls in the housing, commercial and civil engineering sectors.

Housing and commercial activity both fell by their greatest degree since May 2020, from 35.4 to 33.5 and 43.8 to 42.0 respectively.

Civil engineering was the weakest performing part of the sector, with activity at 32.9 – though it was an improvement on the 30.0 recorded in November.

Companies pointed to “fragile confidence among clients” and “subdued underlying demand” which desreased workloads, warning that delayed investment decisions ahead of the Budget in November also “weighed on their sales pipelines”.

But S&P Global said firms remained optimistic, citing forthcoming work in the utilities sector, linked to recent government investment decisions in the water and energy sectors, as well as lower interest rates and a gradual improvement in economic conditions in the UK.

In December 2024, Ofwat approved £104bn of expenditure from English and Welsh water companies for 2025 to 2030, while in October, the government revealed new proposals to speed up planning decisions to drive development in the water and energy sectors. It estimated the change could attract up to £2bn of investment in onshore wind.

There was also positive news on inflation in the PMI data, with average cost burdens rising at the slowest pace since October 2024, thanks to lower purchasing activity and greater competition among vendors. Subcontractor rates also increased by the slowest pace for more than a year.

Aecom head of cost management Brian Smith said the figures showed “things are starting to improve for contractors”.

“January will all be about [contractors] positioning themselves to gradually expand capacity and be on the front foot to win new work when it comes,” he said.

Slowdowns in inflation and cuts to interest rates will also “embolden clients and developers to kickstart schemes left on the back burner”, he added.

But he warned the planning system will have to manage an uptick in projects if higher confidence leads to many starting at the same time.

“Embracing AI and digital tools to complement the influx of new planners will prove crucial,” he said.

Lloyds Bank director and head of construction Max Jones agreed that the analysis offered “a more optimistic outlook for the industry”.

“Recent supply chain improvements mean firms are well placed to meet increased demand, although the sector could face renewed pressure on labour availability,” he added.

He also warned that “competition for specialist skills may intensify” as the number of projects ramp up, calling on firms to plan for that change sooner rather than later.