Construction activity in December fell for first time since last August, according to the latest monthly PMI figures.

Activity and new work declined at the quickest rates since May 2020, with the PMI index dropping below 50 for only the sixth time on record, as business confidence dipped into negative territory for the first time since the initial Covid wave in 2020.

Downbeat sentiment was attributed to expectations of a recession and poor demand conditions, as well as inflationary pressures. That said, the degree of pessimism was marginal.

The fall in business activity during December ended a three-month sequence of growth, and a similar trend was observed for new orders, which saw a renewed fall that was the strongest for over two-and-a-half years.

At 48.8 in December, down from 50.4 in November, the headline seasonally adjusted S&P Global / CIPS UK Construction Purchasing Managers’ Index® (PMI®) – which measures month-on-month changes in total industry activity – registered below the 50.0 mark to signal the first contraction in construction sector output since last August.

Although commercial construction activity continued to rise in the final month of the year, the rate of contraction eased to the slowest in the current four-month sequence and was only fractional overall (index at 50.3).

As such, the uplift in the commercial sector was outweighed by contractions across the residential and civil engineering sectors in December. Housing activity declined for the first time since last July and only marginally (48.0), while civil engineering recorded a sixth consecutive monthly contraction in output (46.8) and the rate of decline remained sharp overall.

December data pointed to the first fall in employment since January 2021. Weak sales meant vacancies were often not being filled, according to panellists.

Elsewhere, firms pared back on their purchasing for first time in three months in December, reportedly due to lower workloads. Notably, the rate of reduction was the steepest for over two-and-a-half years.

Average lead times for inputs lengthened to a greater degree nonetheless, with delays the most severe since last June. Shortages and shipping issues were cited as the cause.

Turning to prices, costs faced by construction companies continued to increase during the final month of the year, linked by panellists to energy, material, fuel and import costs.

Although still marked, the rate of inflation was the weakest for two years. Rates charged by subcontractors also rose in December, but at a slightly reduced pace.

Lewis Cooper, economist at S&P Global Market Intelligence, which compiles the survey said: "The challenging environment in December was subsequently reflected in pessimism amongst firms towards activity levels over the coming year, with business confidence downbeat for only the sixth time since the survey began in April 1997.

"With the outlook turning negative, staffing levels declined for the first time since the start of 2021 in December. Though panellists primarily attributed the fall to the non replacement of leavers, the data show that companies are preparing to face significant challenges in the months ahead."

Dr John Glen, chief economist at the Chartered Institute of Procurement & Supply, said: "Optimism remained very flat and at one of the starkest rates in the survey’s history. Builders were reining back on recruitment unconvinced there will be enough growth in the UK economy in 2023 to justify additional expenditure when margins remained so squeezed.”

Association for Consultancy and Engineering (ACE) CEO Stephen Marcos Jones struck a more optimistic tone. He said: “While 2022 finished on a rather downbeat note for the industry, we should be optimistic that 2023 will bring better news for the sector. After a year of growing inflationary pressure, these look set to drop back over the coming months. We also hope for a more stable political environment this year which will boost certainty and be welcome news for both public and private clients. 

“With a strong pipeline confirmed by the chancellor in November’s Autumn Statement, we look forward to seeing progress on some of these key projects which will boost economic activity, create jobs and deliver growth.”

Mark Robinson, group chief executive at SCAPE, said: “After a drop off in activity towards the back end of last year, December’s figures are further evidence of the recession strengthening its grip on the economy. The construction industry is braced for a tough year and, while there are positive signs that inflation has peaked, increased material costs will undoubtedly continue to shape the plans of developers and local authorities – that latter of which will be confirming their annual budgets this month.

“Maintaining clear, positive dialogue in 2023 will be crucial if projects are to progress uninhibited, and calm and cautious management will likely pay dividends further down the line when purchasing decisions are ready to accelerate again.”

PMI data was collected between 06-22 December 2022.