Building firms upbeat despite Red Sea disruption weighing on costs

Latest PMI survey shows UK construction businesses most optimistic in two years on hopes that interest rates have peaked.

British construction companies remain optimistic despite experiencing the first hike in building costs since last autumn as Red Sea disruption pushes shipping prices higher.

The latest closely-monitored S&P Global/Cips purchasing managers' index (PMI) for the construction sector revealed that overall input costs rose last month for the first time since September and at the fastest pace since May last year.

Some firms flagged higher costs for imported building materials due to the Red Sea attacks on ships, according to S&P Global. The warning comes as clothing and home retailers and supermarkets have warned over delays to imported stock and higher costs as ships are being forced to reroute away from the region.

Housebuilding remained the weakest-performing category, despite the rate of decline easing to its slowest since March 2023.

Despite the cost pressures, the PMI survey showed that UK construction businesses were the most optimistic in two years on hopes that interest rates have peaked and the worst of the downturn is behind them. The report recorded a better-than-expected headline reading of 48.8 for January, up from 46.8 in December and the highest reading since August last year.

Tim Moore, economics director at S&P Global Market Intelligence, which compiled the survey, said: “UK construction companies seem increasingly optimistic that the worst could be behind them soon as recession risks fade and interest rate cuts appear close on the horizon. The prospect of looser financial conditions and an improving economic backdrop meant that business activity expectations strengthened to the highest for two years in January.”

He added: “Housebuilding remained by far the weakest-performing category, despite the rate of decline easing to its slowest since March 2023.”

Economic think-tank the EY Item Club said the latest construction PMI added to signs of a “promising start” to 2024. Martin Beck, the organisation’s chief economic advisor, said: “The EY Item Club thinks there are good reasons to take a more upbeat view of construction’s prospects. The speed and scale of interest rate rises in recent years has been one of the chief headwinds to construction activity, tightening credit conditions, increasing debt costs and investment hurdle rates.

“This has weighed on economic growth, as well as demand for residential and commercial property. But the drag from this source now looks set to ease much sooner and faster than had been expected only a few months ago.”

Kelly Boorman, national head of construction at audit, tax and consulting firm RSM UK, noted: “There remain challenges, as last year, construction saw a 6 per cent fall in apprenticeship starts. In addition, with more than 500,000 UK construction workers also set to retire in the next ten years, the industry could be facing a real skills and productivity issue.”

The PMI came as new research from housebuilder Redrow revealed that 66 per cent of young women already work in, have considered working in or are open to working in construction, up 17 percentage points from last year. The survey of 1,000 young adults found that it’s not just the potential high salary young women find appealing (39 per cent), but also the opportunity to have a long-term career (26 per cent) and the ability to set up their own business later down the line (25 per cent).