Construction index continues to signal rapid contraction of activity

The CIPS/Markit UK Construction Purchasing Managers’ Index (PMI) remains at an exceptionally low level, despite rising from 29.3 in December to 34.5 at the start of 2009.

The indicator, which is designed to provide a single figure measure of trends in construction sector activity, shows the highest reading for three months, yet remains at a historically low level and points to a substantial monthly contraction in the UK construction economy.

Output dropped steeply across all three monitored sub-sectors of the UK construction industry in January, albeit at slower rates than during the previous month. Once more, the weakest sector was housing.

After falling at a series record rate in December, the contraction in incoming new work to UK constructors eased sharply in January. However, with the majority of those surveyed still reporting leaner order books, the rate of decline remained rapid. Low market confidence and demand, caused by the financial and economic crises, were mostly blamed for the latest decrease.

Both employment and sub contractor usage took a considerable knock in January as new orders and activity fell. Constructors made use of natural wastage and redundancies to streamline their workforces. As sub contractor employment declined, their availability rose at the greatest extent in the series history.

UK constructors continued to report falling input costs during the latest survey period, as weak global demand for fuel and raw materials pushed their prices down. However, the rate of deflation eased for the second month running.

In spite of poor business conditions, constructors were more optimistic in January regarding the outlook for activity over the next year, with confidence at its highest for seven months. A number of firms held beliefs that the worst of the global credit and economic problems were behind them. However, sentiment was still relatively subdued in comparison to general confidence levels before July 2008.

Gemma Wallace, economist at Markit Economics said: “A number of UK constructors believed that they were over the worst in January, and were looking more hopefully towards the coming year than they have been in recent months. Although PMI data did signal some improvement in many indices, most remained at historically low levels, which certainly provides no guarantee of the sector being on the road to recovery.”

Roy Ayliffe, director of professional practice at the Chartered Institute of Purchasing and Supply (CIPS), said: “The remainder of this quarter will be important in ascertaining if the rise in the indices in January was an aberration or a real sign of a turning point in the cycle.”