UK construction companies indicated a strong improvement in business activity expectations in January, with optimism reaching its highest level for two years.

This was according to the S&P Global UK Construction Purchasing Managers’ Index (PMI) – a seasonally adjusted index tracking changes in total industry activity.

The index provided mixed news, one the one hand survey respondents often cited hopes of a turnaround in client demand due to looser financial conditions and more favourable underlying economic prospects.

However, on a specific sector basis house building continued to fall sharply at the  start of 2024. Survey respondents noted subdued demand conditions and a lack of work to replace completed projects. The rate of contraction for residential activity nonetheless eased to the least marked since March 2023.

January data indicated a reduction in total new work for the sixth consecutive month, but the pace of decline was only marginal and the weakest seen over this period. Companies reporting a fall in new business generally cited delayed decision-making among clients and subdued market conditions, especially in the house building segment.

S&P Global Market Intelligence economics director Tim Moore said: “UK construction companies seem increasingly optimistic that the worst could be behind them soon as recession risks fade and interest rate cuts appear close on the horizon.

“The prospect of looser financial conditions and an improving economic backdrop meant that business activity expectations strengthened to the highest for two years in January. Moreover, there were again signs that customer demand is close to turning a corner as total new orders fell to the smallest extent for six months.

He added: “Relatively subdued pipelines of new work nonetheless resulted in lower levels of construction output for a fifth successive month in January. House building remained  by far the weakest-performing category, despite the rate of decline easing to its slowest since March 2023”.