IHS Markit/CIPS Construction PMI (Dec.) - Capital Economics
UK Housing

IHS Markit/CIPS Construction PMI (Dec.)

UK Housing Market Data Response
Written by Andrew Wishart

The seventh consecutive construction PMI reading of over 50 in December mainly reflected a continued strong recovery in housing activity. The rebound in construction of commercial property has already all but petered out according to the survey. And given we think that residential transactions will slump after the stamp duty cut ends in March, the recovery in housing construction is also likely to run out of steam come the summer.

Construction continues to recover…for now

  • The seventh consecutive construction PMI reading of over 50 in December mainly reflected a continued strong recovery in housing activity. The rebound in construction of commercial property has already all but petered out according to the survey. And given we think that residential transactions will slump after the stamp duty cut ends in March, the recovery in housing construction is also likely to run out of steam come the summer.
  • The construction PMI was almost unchanged in December, edging down from 54.7 to 54.6. That reflects a differing experience across subsectors. While the housing activity index rose from 59.2 to 61.9, the commercial activity PMI eased from 51.9 to 51.2 and the civil engineering activity index from 52.3 to 48.0. (See Chart 1.)
  • As construction sites are permitted to remain open in the new lockdown, construction activity will not collapse as it did in Q2 2020. However, staff absences due to illness and ongoing difficulty obtaining supplies are likely to slow down the recovery somewhat. Indeed, the sub balances of the PMI showed that supplier delivery times lengthened and input prices rose in December.
  • The strength of the housing activity PMI probably reflects a rush to completion as opposed to a strong pipeline of new work. Data from NHBC show that while completions were only down by 7% y/y in the three months to October 2020, new housing starts were down 16% y/y. Our forecast that transactions will slump after the stamp duty cut ends suggests that new starts will remain weak this year. (See here.) And with the Help to Buy equity loan scheme to be limited to first time buyers from April, it would be unsurprising if builders were prioritising completions.
  • The small drop in the commercial construction sub-index, from 51.9 in November to 51.2 last month left it at its lowest level since May. More encouragingly, the forward-looking balances in the survey improved. The future activity balance rose for the fifth consecutive month from 67.2 in November to 69.8 in December. However, we think any recovery in commercial output will be limited. After all, the latest lockdown will likely result in the economy starting the year in recession. (See our Update.) This will probably hit occupier demand in the commercial sector and further weaken values. As a result, we think this will limit the number of projects that developers start this year.
  • Overall, while construction sites will remain open during the new lockdown, it is still likely to be a headwind to activity. And weak housing transactions and limited appetite for new commercial developments point to weak construction activity further ahead too.

Chart 1: IHS Markit/CIPS Construction PMIs

Source: IHS Markit/CIPS


Andrew Wishart, Property Economist, andrew.wishart@capitaleconomics.com, +44 (0)7427 682 411
Prohad Khan, Property Economist, prohad.khan@capitaleconomics.com