Construction returns to growth despite lingering concerns over margins

Construction returned to growth in March after six months of falling output despite lingering worries over margins and risk averse clients.

New orders expanded at the fastest pace since May 2023 amid growing signs of an improving economic outlook, according to the S&P Global/CIPS UK construction Purchasing Managers’ Index (PMI).

The index rose from 49.7 in February to 50.2 in March, the highest level since August last year. Any reading above 50 indicates an overall expansion of output.

But while many respondents commented on a greater number of business enquiries helped by easing borrowing costs, construction firms are still cautious about increasing their headcounts with employment numbers falling for the third month running.

S&P Global Market Intelligence economics director Tim Moore said: “Staff hiring was a weak spot for the construction sector in March amid lingering concerns about margin pressures and continued risk aversion among major clients.

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“Construction firms often reported delays with replacing departing staff, which led to a decrease in total employment numbers for the third month in a row.”

However, the broader picture was largely positive with supply chain pressures easing amid subdued purchasing activity, resulting in cost inflation slipping to a three-month low.

The rate of job shedding also increased only marginally and eased compared to the previous month, while 49% of the survey panel said they expect output to rise over the next 12 months compared to just 11% predicting a decline.

Civil engineering was the best performing sector in March, while the stabilising housing market saw residential work reach its best performance since November 2022.

Reacting to the figures, Aecom head of cost management Brian Smith said: “The construction industry’s slump has thankfully stopped short of the seven-month mark, in time for more favourable weather conditions and with some of the financial pressures it has faced in recent times easing.

“With inflation continuing to fall, the Bank of England has opened the door to rate cuts anticipated in the next few months, easing finance costs which will boost the willingness of developers to push forward with paused projects.

“There remain challenges for construction firms in the short term. An increasingly competitive tendering market is expected to remain for rest of this year and, although some input costs are falling, labour shortages and the resulting price rises are challenges that will remain.”

Lloyds Bank’s infrastructure and construction director Max Jones added that the rise in output reflected a “broader shift” in sentiment within the sector as inflation wanes. 

“Contractors have already seen encouraging signs of a rise in projects and development opportunities this year, particularly in social infrastructure spaces, which increasingly require a more sustainable approach,” Jones said.

But he urged firms to invest in their workforce to take advantage of new opportunities in the net zero pipeline.