Construction in worst downturn for five-and-a-half years
The construction sector suffered its worst downturn in output for five and a half years last month, new figures have shown, in a warning to the Labour government as it hopes to build 1.5m homes by 2030.
A monthly S&P Global survey showed that the decline in output rapidly accelerated over the month, with the purchasing managers’ index (PMI) falling to 39.4, more than 10 points below the benchmark figure for neutrality.
Housing activity weighed on construction output, with the PMI for the sub-sector dropping to 35.4. Commercial construction was 43.8 while the PMI for civil engineering stood at 30, with all areas dropping at the fastest rate since the pandemic.
The drop in output was driven by low confidence among investors, a lack of new work being commissioned and delays in starts for new projects, according to some 150 survey respondents.
Just under one in five firms (17 per cent) said they signalled an increase in new orders.
Businesses also said that Budget rumours contributed to a downturn in sales and weakened risk appetite. Confidence for the year head also plummeted to its lowest level since December 2022, with cutbacks to investment budgets and worries about the UK’s long-term prospects damaging hopes of a revival in the sector.
Construction downturn deals blow to Labour
Fresh data is likely to cast doubt on the government’s hopes of building some 1.5m over the course of the next five years, an ambitious target that has received criticism from industry groups including Construction Plant Hire Association (CPA).
The Office for Budget Responsibility (OBR)’s report last week suggested that house building activity would pick up from 2027 when the planning bill materialises, though it warned that new environmental safeguards added in through amendments “pose downside risks” to projections.
Higher construction output also hinges on Labour’s economic growth mission, though economists at the OBR and Bank of England have suggested that pre-Budget briefings on possible tax rises dampened output levels across the UK.
Thomas Pugh, chief economist at the accountancy RSM, said the drop in output in the construction PMI reading was “yet another piece of evidence that pre-budget speculation about large tax rises was having a significant negative impact on business confidence”.
“It doesn’t bode well for growth in the fourth quarter, where there is a real risk of flatling or even a contraction,” Pugh said.
“Looking ahead, the construction sector should start to improve, as confidence improves after the budget, and interest rates come down a little further.”
Pantheon Macroeconomics chief UK economist Rob Wood said: “The ONS official measure of construction output has been faring far better than the PMI signal.
“There’s no doubt that construction firms are extremely disappointed in the government’s progress, but we think the PMI remains too pessimistic.”