The construction industry outperformed the rest of the economy in 2020 by being the first and only sector to see output recover to its pre-virus level. But the unexpected dip in the construction PMI in January suggests that the revival might be fragile. Indeed, we suspect that falling values will weigh on both commercial and residential construction this year.
Star performance starts to fade
- The construction industry outperformed the rest of the economy in 2020 by being the first and only sector to see output recover to its pre-virus level. But the unexpected dip in the construction PMI in January suggests that the revival might be fragile. Indeed, we suspect that falling values will weigh on both commercial and residential construction this year.
- The drop in the construction PMI from 54.6 in December to 49.2 in January took it below the 50 level that has supposedly separates expansion and contraction. (See Chart 1.) The size of the slide was a surprise given the construction sector has remained open in the latest lockdown. The consensus expectation was 52.9 which seemed reasonable seeing as the headline balance rose when the previous, albeit more lenient, lockdown was imposed in November.
- Indeed, the lockdown wasn’t the only reason for weaker activity. Concerns about the near-term economic outlook and hesitancy on the part of clients were also important factors. The new orders balance fell from 56.7 to 50.7. Obtaining materials and sub-contractors was also problematic, perhaps reflecting increased friction at the border since the Brexit transition ended and the big drop in the workforce due to the departure of more than a tenth of foreign nationals that lived in the UK last year.
- Softer activity was reported across the board. The civil engineering balance fell from 48.0 in December to 45.0 in January. Meanwhile, the commercial construction sub-index fell most sharply, from 51.2 to 46.2, its lowest reading since May last year. That chimes with our view that falling values will continue to weigh on the willingness of developers to start new projects and limit commercial construction activity in 2021.
- Housing continued to be by far the strongest sub-sector. Nonetheless, the drop back in the relevant activity balance from 61.9 to 57.1 took it to its lowest level since May 2020. Given signs that the looming end of the stamp duty holiday has started to weigh on buyer demand, and the likelihood of a slump in sales in Q2, it’s not surprising to see activity start to ease. (See here.)
- All in all, the drop in the construction PMI in January appears to be driven by more than just lockdown restrictions. The difficult near-term outlook for the housing market and commercial property justifies concerns about capital values, so it wouldn’t be surprising to see construction output fall back below its pre-virus level later this year.
Chart 1: IHS Markit/CIPS Construction PMI & Construction Output
Sources: IHS Markit/CIPS, Refinitiv