UK construction sector suffers downturn amid high interest rates

At 48.9 in June, down from 51.6 in May, the headline seasonally adjusted S&P Global/CIPS UK Construction Purchasing Managers’ Index (PMI) registered below the neutral 50.0 threshold for the first time in five months.

Residential work (index at 39.6) decreased at the steepest pace since May 2020. Aside from the lockdown-related fall in house-building, the rate of contraction was the fastest since April 2009. Survey respondents widely commented on weaker demand due to rising borrowing costs and a subdued outlook for the housing market.

Civil engineering was the best-performing segment (index at 53.1), with business activity rising at the second-fastest pace since June 2022. Construction companies mostly noted increasing work on infrastructure projects.

Commercial building also expanded at a solid pace in June (index at 53.0), although the rate of growth slipped to a three-month low. Rising demand for refurbishment projects was cited in June, but some firms reported more cautious decision-making by clients.

New order volumes decreased for the first time since January, although the pace of decline was only marginal overall. Subdued demand was mostly linked to the impact of rising interest rates on house building projects, alongside concerns among clients about the general economic outlook.

Dr John Glen, chief economist at the Chartered Institute of Procurement & Supply (CIPS), said: “With interest rates at the highest for 15 years and inflation four times over the Bank of England target, the sudden reduction in construction sector hiring is one of the red flags facing the UK economy at the moment.”

The Federation of Master Builders (FMB) said the fall in construction activity signals the need for the UK government to give a clear commitment to building new homes.

Brian Berry, chief executive of the FMB said: “Small, local housebuilders are struggling in a market that has seen the fastest decline in residential construction since May 2020, which was when the country was gripped by the Covid pandemic. At a time when we need to be building more homes we are moving in the opposite direction and building fewer.

“There is a whole generation of people who can’t get on the housing ladder, which is holding back growth and investment. While it might be politically easy to shelve housing commitments to gain votes in some areas, the government must recommit to their annual housing target of 300,000 homes.”

He concluded: “I’m concerned that the government lacks a clear plan to solve the housing crisis, resulting in overcrowding and increasingly unaffordable rents as more cling on to rental properties as the new housing market shrinks. While there are long term issues to solve with the planning system, the government needs to take the bull by the horns and restate its ambition to build new homes.”

Martin Beck, chief economic advisor to the EY ITEM Club, said: “Construction activity should gain from the increase in economic momentum the EY ITEM Club expects over coming quarters. And the introduction in April of 100% expensing for plant and machinery investment could support commercial building projects.

“However, rising interest rates present a significant counter to these positives. The Bank of England’s policy rate now stands at a 15-year high of 5%.

“The EY ITEM Club thinks sticky inflation and strong pay growth mean the Bank of England will increase rates further. And the prospect of a prolonged period of above-target inflation and a tight labour market will delay the point at which rates are cut. This will slow construction and development, and presents a particular headwind to housebuilding and the housing market in general.”