UK construction firms shed most jobs since August 2020, PMI shows

The UK construction sector contracted for the fifth consecutive month in May, with the S&P Global PMI rising to 47.9 but remaining below the 50 threshold, signaling ongoing weakness. Construction firms reduced staffing at the fastest rate since August 2020 due to rising wages, squeezed margins, and subdued demand, despite a more optimistic outlook for future activity and potential interest rate cuts. House building and civil engineering experienced the steepest declines in activity, while commercial work stabilized; average wages in the sector rose 6.4% year-over-year in Q1, outpacing broader economic wage growth.

Analysis

The UK construction sector demonstrated continued contraction in May, with the S&P Global Purchasing Managers’ Index rising to 47.9 from April's 46.6, yet remaining below the 50-point growth threshold for the fifth consecutive month. This modest improvement, though exceeding economists' forecasts, was overshadowed by construction firms reducing staff numbers at the fastest pace since August 2020. This significant job-shedding is attributed to a confluence of factors including rising wage costs—evidenced by a 6.4% year-over-year increase in Q1 construction wages which outpaced the 0.9% rise in sector output—squeezed margins, and subdued demand. Reflecting these pressures, the use of subcontractors also declined at its sharpest rate since May 2020. Despite these current operational challenges, the outlook for future activity among construction firms improved to its highest level this year, driven by optimism about sales prospects and potential relief from future interest rate cuts. Sector-specific performance varied, with house building experiencing the most significant fall in activity, followed by civil engineering, while commercial work showed signs of stabilization. The overall situation reflects a moderately negative sentiment and an uncertain tone, balancing immediate difficulties against tentative future optimism.

Key Decisions for Investors

• Investors should maintain a cautious stance on UK-focused construction equities, particularly those heavily exposed to residential building and civil engineering, given the persistent sector contraction and significant labor cost pressures.
• Monitor key economic indicators such as upcoming wage inflation data, corporate profit margin reports from construction firms, and Bank of England communications regarding interest rate policy, as these will be critical drivers for the sector's performance.
• While the improved forward-looking sentiment offers a glimmer of potential recovery, the current environment of declining employment and subdued order books warrants a risk-aware approach, potentially favoring companies with strong balance sheets and diversified operations until tangible signs of a broad-based upturn materialize.