UK Construction PMI Rises in December Despite Economic Worries

Summary

  • The UK construction sector’s Purchasing Managers Index (PMI), as reported by S&P Global/CIPS, experienced a minor uptick from 45.5 in November to 46.8.
  • Despite the rise, it is still below the 50.0 mark indicating growth for the fourth consecutive month.
  • A significant percentage of firms are apprehensive about the UK’s economic outlook, particularly concerning commercial projects.
  • The Bank of England’s continuous rise in borrowing costs has resulted in the highest benchmark interest rate in 15 years, which severely affected commercial construction.
  • Despite the circumstances, the prospect of falling interest rates has somewhat buoyed construction company confidence.
  • On a positive note, around 41% of surveyed firms are optimistic about business activities rising in 2024, suggesting a shift from the predominant negative sentiment a year before.

Details on the Economic Climate Impacting the Construction Sector

The construction industry has remained wary of the UK’s economic prospects, particularly the impact on commercial projects, as reported by Tim Moore, Economics Director at S&P Global. The commercial construction sector experienced its most significant contraction since January 2021, prompted by Bank of England’s 14 consecutive borrowing cost hikes aimed at combating inflation. These increases have seen the benchmark interest rate reach a 15-year peak.

The Impact of Interest Rates

Conversely, Tim Moore highlighted that the anticipation of declining interest rates in the coming months appears to have stoked confidence among construction firms. As per the survey conducted in December, about 41% of participating firms foresee a rise in business activities over 2024, with only 17% predicting a decrease. This optimism starkly contrasts the overwhelmingly negative sentiment prevalent just a year ago.

House-Building and Civil Engineering

Though house-building continues to pose the most considerable burden on the sector, the rate of decline was the least severe since July of the previous year. Similarly, civil engineering activity contracted at a slower pace in December. Overall input prices for the sector dropped, though not as dramatically as in November, when the cost of raw materials decreased at its steepest rate since July 2009.

Contrast with the Services Sector

In contrast, S&P Global’s metrics for the much larger services sector showed stronger-than-expected growth last month. The all-sector PMI, which amalgamates construction data with figures from the services and manufacturing sectors, witnessed a rise to 51.7 in December from 50.2 in November. This marks the highest point since June.

This economic climate could significantly impact foreign exchange or trading, particularly concerning assets related to the construction and services sectors, given the volatility in these areas.

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