The UK construction sector displayed signs of a turnaround in January, with the Purchasing Managers' Index (PMI) rising to 46.4 from 40.1 in December, according to the latest report from S&P Global. This figure significantly exceeded market expectations of 42.0, marking the highest reading since June 2025. Despite remaining below the 50.0 threshold that separates expansion from contraction—indicating the sector's longest period of decline since the 2007 financial crisis—the sharp slowdown in the rate of contraction suggests that downward pressure on the UK construction industry is easing, with overall conditions showing signs of bottoming out.

Tim Moore, Economics Director at S&P Global Market Intelligence, commented, "The January data provides encouraging signs that the UK construction sector has moved past a phase of sharp decline, with firms growing more hopeful that new projects will resume in 2026." Following the budget announcement by UK Chancellor Rachel Reeves on November 26, 2025, all components of the index improved from their December 2025 lows as demand stabilized. A rebound in public sector activity and an increase in commercial sales inquiries contributed to the slowest decline in total new business in three months.

However, residential construction—a priority area under the Labour government, which has pledged to build 1.5 million new homes—remains the weakest segment, struggling with soft demand, low client confidence, and a shortage of new project starts. Despite these challenges, S&P's latest report highlights positive signals, indicating that residential construction activity is recovering from its pandemic-era low recorded the previous month.

Construction firms across sectors continue to grapple with cost pressures eroding profits. Companies reported the largest increase in purchasing costs since September, driven by rising wages and raw material prices. These challenges have led to workforce reductions for the 13th consecutive month. Nevertheless, improved investment sentiment and lower interest rates have bolstered optimism for the year ahead. S&P's confidence index climbed to its highest level since May 2025, with nearly 40% of surveyed firms expecting output to improve over the next 12 months, compared to only 17% anticipating a decline.